The Auto Companies Need Help – But Traditional Chapter 11 isn’t the Way to Go.

The American Auto Industry is in trouble, there is simply no other way to put it. President Obama’s decision today to “fire” GM CEO Rick Wagoner – and force Chrysler into an alliance with the Italian Fiat – has thrown the planned reorganization into chaos. Yet Obama has shown himself unwilling to directly pressure either the unions or the stakeholders, which may suggest that only a controlled court-based reorganization can save the two of the Big 3.

Unfortunately, the normal process for such a move would be Chapter 11 Bankruptcy – and that should be out of the question for either GM or Chrysler. Unlike an airline or a retail chain, where commitments are usually short-term, the decision to buy a car can last a decade or more. And, since cars inevitably break down, crash, and require general repair, there is a hesitancy by many to purchase an American car – a move many fear could leave them with no warranty coverage. Obama’s decision to have the government back the warranties was a good first step, but it could still mean very little if either company is forced into a traditional Chapter 11 reorganization.

There is no question that all of the Big 3 need to make serious changes, and if the government is not going to help by pressing the unions in particular into taking their fair share of the sacrifices that have to be made, then it needs to offer the struggling car makers a kind of pre-packaged bankruptcy – one that would involve entrance and exit within hours or days of each other. A regular airline-style bankruptcy still carries a kind of stigma among consumers that could destroy the existing demand and force GM and Chrysler out of business. People simply will not buy a car from a company they fear is going to simply cease to exist, and unless Obama can solve that problem, his threat to simply walk away could be a death sentence.

Note: This is exactly what Mitt Romney predicted a couple months ago – you can’t hand the car companies a check and then demand they get serious concessions from their unions. You have to offer them the kind of legal restructuring used in bankruptcy – without the actual Chapter 11 filing.

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