Auto Bailout Debate Turns to Bankruptcy

U.S. automakers seem unlikely to secure $25 billion in emergency loans from Congress. But a new debate has emerged over the possibility of a planned or "pre-packaged" bankruptcy filing.

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ROBERT SIEGEL, host:

From NPR News, this is All Things Considered. I'm Robert Siegel.

MELISSA BLOCK, host:

And I'm Melissa Block. We begin this hour with auto companies' troubles and how they trickle down. In a moment we'll hear from the CEO of a major auto parts supplier which makes things like shock absorbers.

SIEGEL: First, the chief executives of GM, Ford, and Chrysler were back on Capitol Hill today, making their pitch for financial aid, this time to a House committee. The CEOs are asking for $25 billion, and there is strong opposition. We're going to begin this hour with another idea that some members of Congress are floating - a prepackaged bankruptcy filing. NPR's Frank Langfitt is here to talk about what that means. Hello, Frank.

FRANK LANGFITT: Hi, Robert.

SIEGEL: Prepackaged bankruptcy, what is it?

LANGFITT: It's kind of a fancy word for a bankruptcy that's organized in advance. The idea is you sit down with creditors, you figure out who gets how many cents on the dollar, get your ducks in a row. And obviously it's better to go in organized than fighting it out in court. Bankruptcy experts say it's quicker, less expensive, there's more certainty, and they tend to be more successful. But they also say, while this sounds great, it's no panacea. Creditors can change their position, and these sorts of things can fall apart.

SIEGEL: Why do you think it is that the conversation has evolved a bit this week, not so much should it be bankruptcy as what kind of bankruptcy?

LANGFITT: Well, I think that there's a worry that this political process is not going to fix the companies' problems. I was on the phone with a number of experts today, and they fear that there are too many vested interests. You can hear the - they've been watching the same hearings we have, legislators talking about protecting towns and plants. And while that's humane and that's their job, maybe it doesn't make economic sense. Some people are saying that bankruptcy, while very painful, may be the best for the companies in the long run and the taxpayer.

And the idea is in bankruptcy you can do kind of the radical change that these companies need. Companies will have a freer hand. They can reopen the union contracts. They can break contracts, perhaps, with dealers, of which there are clearly too many. And it's a better chance to cut costs and move towards profitability. I talked to Jay Westbrook. He's a business law professor at the University of Texas at Austin. And here's what he had to say.

Professor JAY WESTBROOK (Chair of Business Law, University of Texas at Austin): The bankruptcy process is a standalone set of laws that are well-established rules and procedures. You've got judges who are in charge of this process. So there's at least a fair amount of insulation. I won't say complete insulation, but a fair amount of insulation from the political process.

SIEGEL: Well, would it just be a bankruptcy judge? Would that be the extent of the government's presence in a bankruptcy proceeding, or would the government play a larger role than that?

LANGFITT: I think some people think it might play a larger role. And in a word, it could be financing. You know, right now the credit markets are still tight, and that's one of the big reasons we see the Detroit Three here in Washington. They're running out of money - particularly Chrysler and GM - and they need this help. They could have a hard time getting financing in bankruptcy to keep running, and people I've talked to say the government might guarantee some loans to them or even make direct loans.

SIEGEL: Now, the companies strongly oppose bankruptcy. It would be more surprising if they said, we're seriously considering filing for bankruptcy. But they say it's not an option, that jobs would be lost. And they make an argument that a car company is different - that a customer's relationship with a car is different from an airline ticket, say. You have to depend on the warranty for service. If you go into bankruptcy, people will stop buying their cars.

LANGFITT: Well, you know, this is sort of their most interesting argument - the one that I think has captured people's imagination. They think, well, this makes some sense. But some people I talked to today said, you know, the companies could set up a pool of money to help pay for warranty work while they're in Chapter 11, or the government could guarantee warranty work. Keep in mind, a warranty, you know, it's a form of insurance. And if the government backs it, maybe it would reassure customers. The other thing is, you know, this concern maybe about the availability of parts if GM went into bankruptcy. But let's take Delphi. It's a huge parts supplier to GM. It's been in bankruptcy for over three years, but that hasn't affected car sales.

SIEGEL: People are still buying Buicks, even though - or at least some people are - even though the parts supplier might not be there.

LANGFITT: Absolutely, and I don't think that it's affected the customer's mindset towards the actual brand.

SIEGEL: Thank you, Frank.

LANGFITT: Happy to do it, Robert.

SIEGEL: NPR's Frank Langfitt.

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