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article imageLet the Automakers Go Bankrupt. It Might Save Us Money

By Joan Firstenberg     Feb 17, 2009 in Business
The deadline is now for General Motors and Chrysler to present their reorganization plans to the government so they can keep the billions loaned to them in December, but it doesn't look like they can meet them. Experts are saying, 'Let them go bankrupt'.
General Motors and Chrysler are rushing to put together restructuring plans in time for the government-mandated deadline of Tuesday. As they do this, a top expert on debt and bankruptcy says the Obama administration should forego "making nice" with them and push them, instead, into bankruptcy.
Edward I Altman, the Max L. Heine professor of finance at New York University's Stern School of Business says,
"If done right, the move could help ensure that taxpayers remain first in line for repayment. The question is, does the Obama administration have the courage to take that next step?”
Altman'is two biggest concerns are for GM and Chrysler to come up with a plan to restructure themselves in the least painful way, and also to protect the billions of dollar in government money that's already been lent to the automakers.
Back in December, the government lent GM $13.4 billion and Chrysler $4 billion. But it is still in question whether they get to keep the money.
The New York Times reported Sunday that the U.S. Treasury is now negotiating with the carmakers, and has hired an investment bank and two law firms as advisers. One of their biggest goals is to make sure that taxpayers (you and me) fall into the top layer of GM's capital structure.
Mr. Altman is proposing that the government force GM into bankruptcy, and then give it what is called debtor-in-possession financing. He says the company will probably need about $50 billion, considering that GM is currently burning cash at a rate of about $2 billion each month. Altman proposes that the money be given out in increments, with GM expected to meet certain goals to get the next bundle of cash.
“Basically, the idea is that we’re going to stop throwing good money after bad. I think it’s very important that the government take a stand on this somewhere. Otherwise, it’s going to continue.”
But critics argue that the largest debtor in possession loan on record is the $8 billion that was lent last month to Lyondell Chemicals. And they say it won't be easy to bring together a group of bankers that can come up with $50 billion given the troubles in the banking industry these days.
The bankruptcy of GM and maybe Chrysler is worrisome to some experts who say it would crate a huge disruption in the economy. But Mr. Altman discounts those worries, saying that if the process was done right, the markets would recover, and the plan would likely include some sort of guarantee for auto warranties, even in the worst-case event of a GM liquidation.
One of the rosier pictures of a possible bankruptcy are that the automakers will be able to finally save costs and more effectively bargain with their suppliers, unions, and bondholders.
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