WASHINGTON – The
Bush administration is looking at "orderly" bankruptcy as a possible way to deal with the desperately ailing U.S. auto industry,
Treasury Secretary Henry Paulson said Thursday as carmakers readied more plant closings and a half million new
jobless claims underscored the deteriorating national economy.
With General Motors, Chrysler and the rest of Detroit anxiously awaiting a White House decision on billions of dollars in emergency federal loans, Paulson said bankruptcy for Detroit automakers should be avoided if possible but that an orderly reorganization may be the best option to keep them from collapsing.
"If the right outcome is reorganization or bankruptcy, then isn't it better to get there through an orderly process?" Paulson said in a speech to a business forum Thursday night in New York.
Paulson said it was too risky to simply let the automakers fail.
"When you look at the size of this industry and look at all those that it touches in terms of suppliers and dealers ... it would seem to be an imprudent risk to take," he said.
President George W. Bush, asked earlier about an auto bailout, said he hadn't decided what he would do but didn't want to leave a mess for Barack Obama who takes office a month from Saturday. A White House decision on helping the troubled automakers could come as early as Friday.
Bush, like Paulson, spoke of the idea of bankruptcies orchestrated by the federal government as a possible way to go — without committing to it.
"Under normal circumstances, no question bankruptcy court is the best way to work through credit and debt and restructuring," he said during a speech and question-and-answer session at the American Enterprise Institute, a conservative Washington think tank. "These aren't normal circumstances. That's the problem."
Paulson said Bush wants to avoid automakers filing for bankruptcy protection but that the No. 1 priority is putting automakers back on a viable path. Part of that effort, he said, would require all sides coming together to make sacrifices to boost competitiveness.
"It's difficult to do such things outside of reorganization. But sometimes that can be successfully done," Paulson said.
White House press secretary Dana Perino addressed the bankruptcy question earlier in the day and emphasized there were still several possible approaches to assisting the automakers, including short-term loans from the Treasury Department's $700 billion Wall Street bailout program.
The Big Three automakers said anew that bankruptcy wasn't the answer, as did an official of the United Auto Workers who called the idea unworkable and even dangerous. GM said a report that it and Chrysler had restarted talks to combine was untrue.
House Speaker Nancy Pelosi said on Capitol Hill that grim new unemployment data heightened the urgency for the administration "to prevent the imminent insolvency of the domestic auto industry."
The California Democrat said Bush has the legal authority to act now, and should attach the accountability standards that were included in a $14 billion House-passed and Bush-supported carmaker bailout that died in the Senate last week. That plan would have given the government, through a Bush-appointed "car czar," veto power over major business decisions at any auto company that received federal loans.
Pelosi spoke after the government announced that initial claims for unemployment benefits totaled a seasonally adjusted 554,000 last week.
The comments in Washington came a day after Chrysler LLC announced it was closing all its North American manufacturing plants for at least a month as it, General Motors Corp. and Ford Motor Co. await word on government action. General Motors also has been closing plants, and it and Chrysler have said they might not have enough money to pay their bills in a matter of weeks.
Separately, there were worries that GMAC LLC, which provides financing for GM vehicle and dealer loans along with home mortgages, could be forced to file for bankruptcy itself. GMAC was having trouble finding adequate support from its bondholders for a debt transaction that would allow it to become a bank holding company and gain eligibility for the $700 billion rescue package.
Prices of GM and Ford stocks fell sharply Thursday after the remarks out of the White House. Ford, unlike General Motors and Chrysler, is not seeking billions in federal bailout loans, but a collapse of the other two could hurt Ford as well.
Alan Reuther, the United Auto Workers' legislative director, said the union urged the administration during a meeting this week to follow the provisions included in the House-passed auto aid bill.
"It's our hope that the House bill that was passed is what they will use as a guide, so to speak, when they start releasing funds," UAW President Ron Gettelfinger told WXYZ-TV in Detroit.
Congressional aides in both parties who have been closely following the discussions suggested the talk of bankruptcy could be a tactic to extract more hefty concessions from the companies and union in exchange for granting short-term loans from Treasury's financial industry rescue fund.
Perino said one factor preventing an announcement of action by the administration is that discussions continue with the various sides that would have to sign on to a managed bankruptcy — entities such as labor and equity holders in addition to the companies themselves.
A senior administration official said the talks between Bush officials and the Big Three and their stakeholders amount to information-gathering, not negotiating.
The White House has repeatedly emphasized its opposition to "disorderly bankruptcy" — presumably a Chapter 7 filing that would effectively shut down a company and require liquidation of assets. That has left on the table the possibility of forcing one or more automakers into a Chapter 11 bankruptcy, which allows a firm to keep operating while under a court's purview.
Harlan Platt, who teaches corporate turnarounds at Northeastern University in Boston, said the government may be waiting for an offer of an ownership stake in the companies, much as it received in return for capital plowed into banks. "You really have to ask the question: If this is good enough for Wall Street, why isn't it good enough for Detroit?" he said.
On Thursday, spokesmen for Chrysler, GM and Ford generally referred to their previous comments that bankruptcy was not a workable solution. The car companies argue that no one would buy a vehicle from a bankrupt company for fear that the company might not be around to honor warranties.
"We continue to work with the administration to find a solution to this liquidity crisis," said GM spokesman Tony Cervone.
Chrysler spokeswoman Shawn Morgan noted previous statements against bankruptcy by CEO Robert Nardelli. Financing even a prepackaged bankruptcy would be difficult in the current tight credit market, Chrysler has said.
Cerberus Capital Management LP owns 80.1 percent of Chrysler and a 51 percent stake in GMAC. The New York private equity firm has said its investors are composed of pension funds, university endowments and family investors who are limited in the amount of additional money they can provide to Chrysler.
The National Automobile Dealers Association also spoke out against bankruptcy for car companies "in any way shape or form, orderly or disorderly, prepackaged or unpackaged, managed or unmanaged," said spokesman Bailey Wood.
Bush said the auto industry is "obviously very fragile" and he is worried about what an out-and-out collapse without Washington involvement "would do to the psychology" of the markets.
"There still is a lot of uncertainty," he said.
At the same time, the president said anew that he is worried about "putting good money after bad," meaning taxpayer dollars shouldn't be used to prop up companies that can't survive the long term.
He revealed one other consideration — that Obama will become president in just over a month.
"I thought about what it would be like for me to become president during this period. I believe that good policy is not to dump him a major catastrophe on his first day in office," Bush said.
