Thursday, December 11, 2008

De Facto Bankruptcy?

With the current auto-bailout bill dead in the water, Republicans are offering an alternative. At first glance it seems that the main differences between it and the previous bill are that the Car Czar would be required (as opposed to being authorized) to call in the loans if requirements are not met. Calling in the loans would, presumably, result in bankruptcy. 

The requirements are also changed. The bill would require the automakers to cut their debt by two-thirds, which is a huge amount. GM and Chrysler alone may have nearly $100 billion in debt. 

This seems to be a pseudo-bankruptcy. In a bankruptcy proceeding, debt can be modified by a judge. There will be enormous pressure on creditors to renegotiate their debt in order to avoid that situation. In this sense, the bill does more to force change. 

However, I don't believe this will have the intended result, if that is what it is. GM and Chrysler are facing imminent bankruptcy as we speak, and nothing is happening. No one will want to make the first move, although, in fairness, some creditors may be waiting to see if the government will write Detroit a blank check.

I hope it will not. Detroit cannot continue on the path it is taking. Chrysler is finished. GM can only hope to survive by downsizing enormously. Ford must do the same. We cannot let our sentimentality for these American icons compromise the future economic well being. Life will go on. 

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