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The big fix - but which?

INQUIRER STAFF WRITER With opposition to an auto-industry bailout building in Congress, bankruptcy for one or more of the Big Three automakers is being talked about as a likely and even desirable option.

With its cash stockpile perilously low and the prospect of government help fading, General Motors probably is talking with creditors to buy time until Barack Obama arrives in Washington. (Carlos Osorio/AP File Photo)
With its cash stockpile perilously low and the prospect of government help fading, General Motors probably is talking with creditors to buy time until Barack Obama arrives in Washington. (Carlos Osorio/AP File Photo)Read more

INQUIRER STAFF WRITER

With opposition to an auto-industry bailout building in Congress, bankruptcy for one or more of the Big Three automakers is being talked about as a likely and even desirable option.

But Chapter 11 would hardly be a guarantee of survival.

In fact, some bankruptcy experts say that while it worked for airline companies in the 1990s and others, Chapter 11 likely would be more difficult to pull off for carmakers.

As a general rule, less than half the companies that enter bankruptcy ever regain their footing as functioning businesses. In the case of car manufacturers, a big hurdle is the nature of the transaction between the car buyer and the manufacturer itself. Buyers are purchasing not only transportation but also a multi-year warranty. They might be reluctant to plunk down cash on a car whose maker might not come out of bankruptcy and thus might not be able to honor warranties.

"Because of the importance of a new-car warranty, it is very hard to think about how an auto manufacturer can file and remain in bankruptcy without a certain exit date and still sell cars," said David Stratton, co-chair of the bankruptcy practice at Pepper Hamilton L.L.P.

Natalie Ramsey, who chairs the bankruptcy practice at Montgomery, McCracken, Walker & Rhoads, said that for Chapter 11 to work for automakers, substantial assurances would have to be offered by the government and carmakers that the companies had been re-formed and that a functioning company would emerge.

Ramsey said consumers have responded to such assurances about other bankrupt companies in the past and likely would again.

"There has to be a plan, an expectation, that the business can be successful and profitable," Ramsey said, "or Chapter 11 really doesn't accomplish anything."

Congress is set to begin hearings today on proposals, endorsed by automakers and the United Automobile Workers union, for a massive federal bailout. But opposition on Capitol Hill, largely among Republicans, has been building, and critics are suggesting that such federal assistance would be throwing good money after bad. The automakers' real problem, critics say, isn't a lack of funds, but a failure to build products that people want to buy.

"Companies fail every day, and others take their place," said Sen. Richard C. Shelby (R., Ala.), on NBC's Meet the Press. "I think this is a road that we should not go down."

The White House also has voiced its opposition, saying that a previously enacted $25 billion assistance package for various modernization projects ought to be enough.

No one questions that the carmakers, particularly General Motors, are in dire shape. GM lost $4.2 billion in the third quarter and may run out of cash by the end of the year. Ford Motor Co. and Chrysler L.L.C. also are losing huge amounts of money, although they are not yet quite as hard-pressed as General Motors.

President-elect Barack Obama has endorsed the idea of additional cash for the car companies, as have Democratic leaders on Capitol Hill, who will enjoy larger majorities in both the House and the Senate when the new Congress takes over in January.

But by then it might be too late.

That in turn has triggered talk anew of bankruptcy and its potential advantages. Bankruptcy lawyers and academics say that, far from permanently stigmatizing GM as an economic basket case, bankruptcy could help it once and for all renegotiate labor contracts and downsize its far-too-extensive dealership network to make the company viable.

That is exactly what airlines did in the 1990s to get costs under control and revive their businesses.

"Eastern, Pan American, Continental, it was the business model that was broken, and those companies were operating with a negative cash flow," said Gerard S. Catalanello, a partner in the bankruptcy practice group of Wolf Block, the Center City law firm. "Labor costs were a major problem. They were locked into contracts and deals to operate in certain cities and states, and bankruptcy gave them the ability to break those contracts and fix their business.

"Bankruptcy can do a lot of things and give the company a lot of tools to fix the business," added Catalanello, who is based in the firm's New York office.

But David Pollack, a partner at Ballard, Spahr, Andrews & Ingersoll, said it has been particularly difficult of late to maneuver companies through bankruptcy short of liquidation because their economic fundamentals have been so poor.

"The fundamentals are just so bad, no matter what you do, you just can't get it out" of bankruptcy, he said. "Not every company can be fixed."