All About Japan Autos

Daily Auto News

Many opponents of a government bailout for the Big Three automakers argue that America would be better served by letting the companies (and the biggest, GM, in particular) go bankrupt. A bankruptcy court, they argue, would be able to renegotiate contracts with suppliers, unions and dealerships - perhaps enabling the company to emerge as a competitive global automaker again. But a growing body of evidence suggests that that outcome isn’t likely.

CNN Money reports, “The reasons go deeper than the belief that consumers would shun a vehicle being sold by a bankrupt automaker. Some leading experts said that GM would find it exceedingly difficult to raise the billions in financing it would need to stay in business during a bankruptcy reorganization” While several major airlines have successfully used bankruptcy to restructure, “those companies, filing under Chapter 11 of the bankruptcy code, were able to secure what is known as debtor-in-possession, or DIP, financing.” But frozen credit markets, mean that GM might “be shut out of DIP financing entirely.”

The company would also be unlikely to raise much cash through auto sales while under bankruptcy protection. The company would need to continue operating while under the protection of a bankruptcy court, but the New York Times notes, “A study of 6,000 consumers last summer by CNW Marketing found that 80 percent of them said they would switch companies if G.M. or Ford filed for bankruptcy protection in the United States, suggesting that only G.M. loyalists would stand by the automaker.”

Thus, the company could file for bankruptcy, attempt to reorganize…and fail anyway.

Investor William Ross, who has guided several billion-dollar-plus steel and textile firms through bankruptcy organization and earned the Wall Street nickname “the King of Bankruptcies”, tells Bloomberg that, “a restructuring bid by one of the three top U.S. automakers would topple its peers and drive weakened suppliers out of business because the credit crunch dried up financing.” He added, “A weakened economy and frozen debt markets make an automaker bankruptcy impossible, with a Chapter 11 filing for reorganization resulting in liquidation instead.”

The Indianapolis Business Journal sees the same effect coming. “GM would stop paying suppliers, who then would lack capital to continue supplying Ford Motor Co. and Chrysler LLC. In addition to taking down Ford and Chrysler, the ripple effect would wipe out dealers,” the Journal writes.

Still, CNN Money notes, “there are some who believe that GM should use bankruptcy to reorganize. And to them, a lack of financing to reorganize is just another argument against a federal bailout. ‘If they can’t get financing, then they should just sell the assets and go out of business,’ University of Maryland economics professor Peter Morici said. “That means that bankruptcy reorganization is impractical; it means they can’t be viable under any circumstance.”

While the bailout debate goes on, automakers are trying to sell cars as fast as possible with deep discounts. Research the best car deals for November with U.S. News’ car rankings and reviews.