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Bush to Steer Course Of Aid to Automakers
Managed Bankruptcy Raised as One Option

By David Cho and Steve Mufson
Washington Post Staff Writers
Friday, December 19, 2008

The White House was moving closer yesterday to a dramatic restructuring of the nation's ailing automakers, deliberating among several options including an "orderly" bankruptcy in return for an emergency government infusion of billions of dollars.

As the White House raised the prospect of bankruptcy, senior officials at the Treasury Department were coalescing around an alternative that would reshape the companies but not require them to file for bankruptcy protection, sources familiar with the matter said. Secretary Henry M. Paulson Jr. has repeatedly said that federal help for Detroit must put the companies on track for long-term viability rather than simply delay their collapse.

Throughout the financial crisis, President Bush has leaned heavily on the Treasury to develop a preferred course of action. In this case, however, he is being presented with options and will make the ultimate call, said the sources, who spoke on condition of anonymity because the policy is still being reviewed.

White House press secretary Dana Perino said that no decision had been made but that the administration was "nearing a conclusion" and was "very close."

Under a managed bankruptcy or other form of major restructuring, auto workers unions could be forced to make wage concessions, management could be shuffled and investors' stakes punished or even wiped out.

In answering a question at a morning news conference, Perino said: "There's an orderly way to do bankruptcies that provides for more of a soft landing. I think that's what we would be talking about. That would be one of the options. I'm not saying that's necessarily what would be announced."

In the afternoon, the White House described the bankruptcy idea as one of several being considered.

"No one is hinting that is an option preferred more than any other option," said Tony Fratto, another White House spokesman. He noted that bankruptcy had been included as a possible alternative in unsuccessful legislation backed by the administration earlier this month in an effort to provide a $14 billion bridge loan to General Motors and Chrysler. Ford has said it does not need government money at the moment.

Because the next administration will have the task of overseeing the government loan, President-elect Barack Obama's transition officials have been in close contact with the Treasury and White House, several sources said. One government source said that Obama's aides have similar views as the current administration on what to do for the automakers.

Sources familiar with the negotiations between the Treasury and the car companies say that few auto executives are involved and almost all of those who are talking to the department are financial experts. GM has fewer than six people dealing with the Treasury, mostly answering "nuts and bolts and technical stuff," said a person familiar with the interactions.

The administration has yet to reveal any of its plans to the automakers, according to industry and government officials. Nor has the Treasury engaged with the United Auto Workers in the week since the congressional bailout proposal failed -- except for a single conversation that the union's legislative liaison Alan Reuther called a "fact-finding session."

"It's our view that the Treasury should implement the agreement made with the congressional leaders," Reuther said. "We don't think a prepackaged bankruptcy is feasible. We think that would be a horrible blunder. We think the restructuring can and should be accomplished outside of bankruptcy."

Some union officials have grown frustrated with the slow pace of the administration's decision-making.

"I think the U.S. government has handled this very poorly," said Ken Lewenza, president of the Canadian Auto Workers. "This uncertainty is scaring buyers away. I'm dumbfounded that this is carrying on almost into Christmas."

But financial experts caution that overhauling a major company, even in a prearranged bankruptcy procedure, is a time-consuming process, usually done over weeks or months.

GM shares ended the regular trading session down more than 16 percent. Ford fell nearly 10 percent. When a company files for bankruptcy protection, shareholders' value normally is wiped out.

For a managed bankruptcy, the Treasury would need to get approval of stakeholders, including the companies, bondholders, unions and perhaps dealers and suppliers, too. To win approval in a bankruptcy court, a reorganization must have the support of a majority of the bondholders with at least two-thirds of the outstanding debt not held by suppliers, or in GM's case at least $30 billion. Tracking down bondholders, spread among different funds and investors, can also be difficult.

The UAW must subject changes in wages to a vote of its membership unless the collective-bargaining agreements are altered during bankruptcy. The latter is allowed under certain conditions. "You can't automatically reject the contracts," Reuther said. "You have to go to the bankruptcy judge, and . . . it's a whole process."

A bankruptcy would also stigmatize the companies, discouraging car buyers, the National Automobile Dealers Association said.

"Bankruptcy, whether it's structured or not, would destroy demand for that company's vehicles and put dealers out of business," NADA chairman Annette Sykora said in a written statement.

President Bush, in a speech to the American Enterprise Institute in Washington, said yesterday that withholding government aid to the automakers is not an option and that he does not intend to leave behind a "major catastrophe" for President-elect Barack Obama in the auto industry. Bush said he has not yet decided on a course of action for automakers but was "worried about a disorderly bankruptcy and what it would do to the psychology of the markets."

"I think under normal circumstances, no question the bankruptcy court is the best way to work through credit and debt and restructuring," he said. "These aren't normal circumstances. That's the problem."

An unmanaged collapse of the automakers could trigger massive layoffs, a sell-off on the stock market, and further bankruptcies at suppliers of automotive parts and other firms connected with Detroit's Big Three. In a managed bankruptcy, by contrast, the government could bring together the unions, company executives and other stakeholders to work out an orderly restructuring.

Trouble is also brewing at GMAC, which provides auto loans to GM's customers and dealerships. The firm is applying to become a bank holding company so it can receive help from the federal government's financial rescue initiatives. But the Federal Reserve has required the firm to raise $30 billion for its application to be approved.

Today, the firm faces a key deadline in its efforts to raise those funds. In a filing, GMAC warned that it has been disappointed by how much money its campaign has attracted.

Staff writer Dan Eggen contributed to this report.

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