Orderly bankruptcy? For carmakers, that's an oxymoron.

Posted by: David Welch on December 18, 2008

Ronald Reagan once said that the nine most terrifying words in the English language are, “I’m from the government and I’m here to help.” Detroit’s CEOs and UAW President Ronald Gettelfinger night recall that now-famous line as the Bush Administration and Treasury Department have talked about an “orderly bankruptcy” as a means to “help” them through the financial crisis.

The Administration hasn’t exactly explained “orderly bankruptcy.” But I’ll say again that bankruptcy simply isn’t the way to go for these car companies. (Cue up the readers who hate Detroit’s cars or loathe unions. No matter what I write from here on out, they’ll say I don’t know what I’m talking about) But here are the reasons for anyone who is interested enough to dig beyond the emotional or politicized arguments of television pundits.

A pre-packaged bankruptcy—which has the government, management, creditors, union and dealers negotiating concessions before filing Chapter 11—will still cost tax payers billions. That’s because all of the proposals out there call for the government to provide debtor-in-possession financing. Since the banks who took Henry Paulson’s $335 billion won’t lend that money, you the taxpayer will. And if the car companies are right and consumers won’t buy Chrysler or General Motors cars after they go bankrupt, just flush that money. It’ll be about as recoverable as the savings and loan bailout money was. If they’re right, revenue will fall so fast that even “Neutron” Jack Welch couldn’t restructure fast enough to turn a profit.

Here’s another myth. GM can just file for bankruptcy protection and, “bang” goes the gavel, gone is the labor contract. I asked Delphi Corp. Executive Chairman Steve Miller about that. He has taken several companies into Chapter 11, including Delphi. Miller says that you can only attempt to tear up the labor contract after restructuring the debt and then proving to the judge that more cuts are needed. Even then, Miller says, the judge will try to get the two sides to negotiate a deal. The results are rarely ‘orderly’ and companies often can’t just toss out retiree benefits. Everyone still gets a voice in court and the bargaining can take years.

But at least GM and Chrysler could kill of brands without having to buy off dealers. Well, maybe not. I have heard from a couple of bankruptcy experts who have said that there are laws in some states that still force even bankrupt companies to work out such problems in state court where those local business laws were written and enforced. In other words, killing off, say, Saturn, Saab, Pontiac, Hummer and Chrysler’s namesake brand may not be just a whack of the gavel in federal bankruptcy court. Deals may still have to be cut at the state level. That’s more negotiating and possibly settlements. As an aside, some Republicans love the idea of sending Detroit into bankruptcy. They also love state’s rights. They may want to ponder the irony that one of their hobby horses could be trampling the other.

Unless there’s another way to make all of this orderly, it doesn’t make much sense. And it seems unnecessary since the government has the leverage to get creditors and the union to make concessions outside of court. It’s simple. They give Detroit the money to survive the next couple of months. And then the government holds any more cash until all of the stakeholders cut deals that make the companies viable. If they don’t, the companies collapse and no one gets paid. That sounds more orderly to me.