President Bush announced the federal government will make $13.4 billion in federal loans available almost immediately to Chrysler and General Motors. This money given to the automakers is almost always called a bailout. But in reality it is a short term loan with conditions. Regardless of what its called the question is whether this is a wise thing to do.
The options faced by the automakers if they do not get this money is to file for bankruptcy. There are different types of bankruptcy. In this case the auto makers would file a Chapter 11 bankruptcy which is not a liquidation of the company where the assets are sold off but a corporate reorganization. This will allow the auto companies to renegotiate several of their contracts and gives them an opportunity to reject certain contracts that are unfavorable. They would present a plan to the bankruptcy judge for approval. Once they are out of bankruptcy they would then be bound by the plan the court approved. If later they are unable to comply with the plan the creditors could then force liquidation of the company.
Much of the problems faced by the auto makers is they are paying a lot of money for benefits to retired workers including health care and pension benefits. It has been said that $1500 of every GM car sold goes to pay benefits to retired workers. It appears these payments are creating a choke hold on these companies. If they file for bankruptcy they could renegotiate union contracts and reduce these payments. While that might be good for the company, it certainly would be detrimental to the retired and current union workers.
I am doubtful the auto companies will be able to present to Congress a workable plan on how they will overcome their financial problems and become profitable. I suspect in three months they will either return to Congress asking for more money or be forced to file for bankruptcy.
I do not feel filing for bankruptcy will result in the liquidation of these companies. I also feel the government is in a position to provide the immediate cash needed for these companies to continue to operate and at least plan for recovery or at least prepare for a soft landing if they are forced into bankruptcy. I also suspect these loans will not be dischargeable if these companies eventually file for bankruptcy.
This is a good opportunity for Congress to force the auto makers to reform and make cars that are competitive on the world market and that can use alternative energy to reduce our dependency on foreign oil and at the same time improve our environment.
I think the wise thing to do is give these loans so that a plan can be developed in order to provide these companies some breathing room.