No v. 21 (Bloomberg) — President-Elect Barack Obama’s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.
A representative of Obama’s team has already contacted at least one bankruptcy-law firm to say that Daniel Tarullo, a professor at Georgetown University’s law school who heads Obama’s economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.
U.S. lawmakers yesterday delayed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout. GM today said it would idle production at four plants an extra week and return some corporate jets to conserve cash. Automakers could use a judge-supervised bankruptcy to reduce debt and reject expensive contracts.
“It creates the environment to deal with GM’s problems but limits government financial commitment,” said bankruptcy lawyer Mark Bane of Ropes & Gray in New York.
Bankruptcy is just one option being examined. Obama told CBS News’s “60 Minutes” on Nov. 16 that government aid to automakers might come in the form of a “bridge loan,” advanced if the industry could draw up plan to make itself “sustainable.” The president-elect earlier urged Congress to approve as much as $50 billion to save automakers, using the model of Chrysler’s bailout in 1979.
Tarullo referred questions on a prepack to the transition team press office. Team spokeswoman Stephanie Cutter said, “We have not put out anything specific for the auto industry except that something needs to be done immediately.”
GM, the largest U.S. automaker, said it might run out of cash as early as the end of the year and that the risk was even greater by mid-2009. GM Chief Executive Officer Rick Wagoner said this week GM would have to liquidate if it filed for bankruptcy.
The automaker probably has weeks rather than months left before it runs out of money unless it gets federal aid, Jerome York, an adviser to billionaire Kirk Kerkorian and a former GM board member, told Bloomberg Television yesterday.
In a prepackaged bankruptcy, an automaker would go into court with financing in hand after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed. The process might take six to 12 months, compared with two to five years if the automakers followed an ordinary Chapter 11 proceeding and worked out agreements under a judge’s supervision, Bane said.
Automakers would have to depend on government financing to restructure in bankruptcy court and probably couldn’t attract private loans until they were ready to emerge from the process, Bane said.
Officials of the three automakers told members of Congress this week that they had studied a pre-arranged bankruptcy, championed by Republican lawmakers such as Senator Bob Corker of Tennessee, before dismissing the idea as unworkable.
“We have looked at all aspects, whether it’s a prepackage, whether it’s prenegotiated,” Chrysler CEO Robert Nardelli told a Senate committee on Nov. 18. The options are all “more negative” than restructuring as a condition of receiving federal aid, he said.
Wagoner and Alan Mulally, CEO of Dearborn, Michigan-based Ford, also said under congressional questioning that their companies had studied and rejected the idea of reorganizing under court protection.
`Digging a Hole’
House Speaker Nancy Pelosi said today that bankruptcy for automakers would be “digging a hole far too deep.”
“Rather than going to that next step, let’s hope we can solve it before that,” she said at a briefing in Washington.
In or out of court, automakers will have to submit a viable business plan to gain government funds, Peter Peterson, senior chairman of Blackstone Group LP, said in an interview.
“Unless they can show us the plan, we can’t show them the money,” Pelosi said yesterday.
GM, Ford and Chrysler must submit viability plans by Dec. 2, and Congress would meet the week of Dec. 8 to consider aid, Senate Majority Leader Harry Reid said yesterday. Congress must see accountability from automakers, Pelosi said.
The congressional deadlock was triggered by disagreement over how to pay for the $25 billion the Big Three automakers are seeking.
Democratic leaders have demanded that the recently approved $700 billion bank-rescue fund be tapped for the auto aid. Their plan stalled with opposition from Republicans and President George W. Bush`s administration.
The administration joined Levin, Missouri Republican Senator Christopher Bond and others pushing an alternative that would tap fuel-efficiency loans instead for a bailout.
“There are other alternatives” to a bridge loan for automakers, Senate Financial Services Chairman Christopher Dodd, a Connecticut Democrat, told reporters yesterday. “The prepackaged bankruptcy is not an idea without constituency here.”
A bankruptcy is the “only way” for GM to end union costs that make it uncompetitive, Republican Senator James DeMint of South Carolina said in an interview on Bloomberg Radio.
United Auto Workers President Ron Gettelfinger told Bloomberg Television today that he’s “at the bargaining table” to help find ways to cut costs at U.S. carmakers, signaling that the union may be flexible in making concessions to push through an aid package for the auto industry.
“I look at the Republicans that say it shouldn’t be saved and should be in Chapter 11, and I agree with that,” said James Harris, President of Seneca Financial Group Inc., a restructuring advisory firm in New York. “I look at the Democrats that say these businesses are very important to the economy, and I agree with that, so the logical step is a prepack,” with some government financing, he said.
Treasury Secretary Henry Paulson said the $700 billion of the Troubled Asset Relief Program shouldn’t be used to rescue automakers. “There are other ways,” he said at a Nov. 18 House hearing. Treasury Department spokeswoman Brookly McLaughlin declined to comment on the prepack proposal.
The collapse of GM would cost the government as much as $200 billion should the biggest U.S. automaker be forced to liquidate, Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts, estimates.
A GM failure would mean “more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits,” Behravesh said Nov. 15.
The domino effect could be “scary,” said bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf who teaches corporate reorganization at Harvard Law School and the University of Michigan Law School.
Bankruptcy would trigger failures of auto parts suppliers and dealerships, he said. Securitized auto loans and their insurers would fail, creating ripples through the credit markets, he said.
“The difficulty is assuring the American people that the bailout money won’t simply defer the company’s failure for six to 12 months,” Bienenstock said.