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Bush: GM, Chrysler to go bankrupt

by David Zatz on

The Bush administration has apparently decided, in line with Republican senators, that GM and Chrysler must be forced into bankruptcy as a condition of government loans. 

In the past, the Republican Party has denounced the use of bankruptcy and successfully worked to make entering bankruptcy more difficult for individuals and small businesses. 

Bush’s plan, as described by White House speaker Dana Perino, appears to hinge on providing financing in debtor-in-possession form, rather than the 5%-interest direct loans favored by Democrats and Detroit-region Republicans in Congress. A White House appointee would work with automakers to help them invalidate union contracts and force creditors to take a fraction of what they are owed. The goal appears to be to eliminate the UAW as a force while avoiding sudden shocks to the banking system.  

Under this plan, it is likely that many suppliers would also have to enter bankruptcy as their accounts receivables were slashed, while banks would end up receiving funds from the Federal government to compensate for what they are not repaid by the automakers, to avoid their collapse. 

The plan is likely to be popular, though several times as expensive in the long run as simple loans, because it allows for canceling existing and future pensions and slashing pay and benefits to autoworkers who are widely seen as being overpaid and underworked at salaries reportedly in the mid-$20s per hour (new UAW autoworkers start at $15 per hour). Bankruptcy attorneys, by contrast, earn a mere $1,000 per hour, on par with some Detroit executives. 

Part of the original White House plan was to provide direct loans, but to specify a “car czar” who could force any participating company into bankruptcy if they were “not satisfied” with union and creditor concessions. It is unlikely that the current plan would have different results. 

Automakers that do not wish to declare bankruptcy may need to find enough cash to maintain operations until the White House changes hands in January. General Motors has begun to raise cash by auctioning off rare cars, including prototypes, from its collection. Both Chrysler and GM have slashed production, with numerous plant closings extended into January. (Toyota has also made extensive production cuts.)

David Zatz founded Allpar in 1998 (based on a site he had begun in 1993-94), after years of writing reviews for retail trades. He has been quoted by the New York Times, the Daily Telegraph, the Detroit News, and USA Today. Before making Allpar a full-time career, he was a consultant in organizational psychology. You can reach him by using our contact form (much preferred) or by calling (313) 766-2304

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