It appears that the federal goverment is holding off assistance to the automakers in order to drive them into a prepackaged bankruptcy. Two of the big 3 auto companies need cash immediately or they could go belly up. If the government does not provide funding to GM and Chrysler by January 1st these two companies will probably have to declare bankruptcy. Ford has a strong enough cash position that they should be able to survive into the new year.
In an effort to stave off bankruptcy and slow down their cash burn rates, the big 3 auto manufacturers have announced cost cutting moves today. Chrysler announced that it will close all 30 of its plants for one month beginning December 19th. Ford announced that it is closing 10 plants for three weeks until January 12th. General Motors has suspended construction on a new engine plant. GM will probably be shutting down more plants soon.
The White House does not want to bail out the automotive companies but the President doesn’t want them to fail during a time of economic crisis and rising unemployment. The President prefers that the companies obtain funding through a prepackaged bankruptcy. The President feels that a prepackaged bankruptcy would allow the companies to renegotiate contracts with employees, suppliers and lenders. The government would like concessions from the United Auto Workers on wages, legacy costs and benefits. The government wants to reduce the equity position of shareholders and debt holdings of bondholders.
The Big 3 do not want to go through a prepackaged bankruptcy because they believe that bankruptcy would lead directly to liquidation. GM, Ford and Chrysler believe it would be nearly impossible to sell cars in bankruptcy. Consumers would not want to make such a large purchase from a bankrupt company. The auto companies think that going through bankruptcy would cost even more than the federal funds that they are requesting. According to Bloomberg, a GM bankruptcy would cost 40 to 50 billion dollars in government financing alone.
There are no easy answers to this problem. The best solution is for a compromise outside of the bankruptcy courts but that’s easier said than done. It is troubling that the financial companies had a much easier time receiving 750 billion dollars in federal funds from the government than the automakers have had in trying to get 20 billion dollars.
