Bankruptcy Could Offer GM More Flexibility

"Among the challenges GM has is too many brands," said Maryann Keller, an automotive analyst and author of a book on GM. "It can't shut them down because of existing obligations to dealers where state franchise law prevails."

To meet state franchise restrictions, she said, GM spent more than $2 billion to eliminate the Oldsmobile brand. A Senate Democrat involved in deliberations on the auto industry bailout proposal said that 38 states have franchise laws that make it hard to close dealerships.

None of this lets the federal government off the hook. In the absence of new private credit for GM, the federal government would still need to inject money into the auto giant, probably in return for several billion dollars of preferred shares, while GM restructures and waits out the downturn.

That is all bad news for current shareholders. While they would be wiped out in an unplanned bankruptcy, a prearranged package would still dilute their stake to much tinier levels.

GM, Ford and Chrysler continue to lobby Congress for a $25 billion loan program to steer them through the economic slowdown and credit crisis to 2010. They argue that by then, new union contract provisions, new vehicle models and a better economy will make them profitable again.

In addition to talking to members of Congress, who want evidence that the company has a plan for viability, GM has been talking to UAW representatives, outside lawyers and Georgetown Law School professor Daniel K. Tarullo, a key member of President-elect Barack Obama's transition team.

People familiar with the talks say that the coming week will be critical. The Detroit automakers are due to make their case to Congress for $25 billion in new assistance. It will also be closer to the time that GM might start running short of cash, according to some analysts.

Bondholders are already expecting the worst. GM bonds due Jan. 15, 2011, with a 7.2 percent coupon were selling at 27 cents on the dollar on Wednesday, giving them an effective yield of 89.45 percent -- indicating a strong expectation of default or renegotiation.

While investors are discounting GM bonds, the full face value of the debt is still weighing down GM's balance sheet. In a prepackaged bankruptcy, GM could offer bondholders more than the current market value of bonds and more than bondholders might expect if the company landed in bankruptcy court without a deal. That would still remove most of the company's debt from its books.

There are other possibilities. Advocates of a merger between GM and Chrysler might try to revive that plan. The J.P. Morgan analysts say Congress might approve a short-term bailout to provide GM with enough cash to survive until Obama takes office in January, when he and a new Congress could devise a second, longer-lasting rescue package.

Staff writer Lori Montgomery contributed to this report.