Wednesday, November 19, 2008

Chrysler Considered, Abandoned, Bankruptcy Before Seeking Aid

By Jeff Green

Nov. 19 (Bloomberg) -- Chrysler LLC Chief Executive Officer Robert Nardelli said his company studied a prearranged bankruptcy before dismissing the idea as unworkable and approaching the U.S. government for money to survive. Nardelli and General Motors Corp. CEO Rick Wagoner, who has repeatedly ruled out bankruptcy, told senators yesterday that a failure will lead to an economic ``catastrophe'' much costlier than the $25 billion in aid being proposed by Democrats. GM has said it may run out of operating cash this year.

``We did look at prepackaged,'' Nardelli testified in Washington. ``We looked at pre-negotiated. We've looked at almost every alternative within Chrysler as a privately held company before we came here and ask for support to -- to provide a bridge, if you will, through this economic trough.'' His comments highlighted U.S. automakers' objections to so- called prepackaged bankruptcies, as advocated by some Republican lawmakers. While proponents say a filing with financing in hand would let GM, Chrysler and Ford Motor Co. survive, the automakers say going to court would end in their liquidation. Wagoner, Nardelli and Ford CEO Alan Mulally returned to Capitol Hill today for a House committee hearing as they seek an industry bailout before Congress's lame-duck session ends this week. Opposition from President George W. Bush and Republicans threatens to scuttle Democrats' bid to tap the $700 billion bank-rescue plan for automaker loans. A defeat may push consideration of any new aid into 2009, because House Speaker Nancy Pelosi said yesterday she doesn't intend to reconvene in December.

`Fresh Capital'

``Without fresh capital, we project that GM may not have sufficient liquidity to make it to year end,'' Deutsche Bank AG analysts including Rod Lache in New York wrote in a note to investors today. A GM bankruptcy is the ``only way'' for the biggest U.S. automaker to end union costs that make it uncompetitive, Republican Senator James DeMint of South Carolina said in an interview on Bloomberg Radio. Nardelli, who said Chrysler is down to $6.1 billion in cash and burning about $1 billion more each month, told senators yesterday that bankruptcy would take too much time.

``To a certain degree, all of these take an extensive amount of time,'' he said of the options for arranging a filing for court protection. Auburn Hills, Michigan-based Chrysler would need support from ``all the players, all of the suppliers, all of the vendors, all of the labor,'' he said.

`Very Fragile'

``In fact, we are in a very fragile position,'' he said of Chrysler, whose 26 percent U.S. sales decline this year through October is the most among major automakers. The median time for a prepackaged bankruptcy is 45 days, according to Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles. The median time for an ordinary bankruptcy is about 1 1/2 years, or more than 10 times as long, he said. For GM, a prepackaged bankruptcy plan with federal assistance would involve fewer taxpayer dollars than a bailout done outside of court, said Mark Bane, a bankruptcy lawyer at Ropes & Gray in New York. He isn't involved in GM's case. The Detroit-based automaker could use court protection to reduce debt, reject unfavorable contracts and minimize the risk that it would need a future bailout, Bane said in an interview. ``It creates the environment to deal with GM's problems, but limits government financial commitment,'' he said.

No `Stigma'

``I don't understand the stigma that would come with prepackaged bankruptcy,'' with the benefit of government funds to the industry, Tennessee Republican Senator Bob Corker said yesterday. ``I don't know how that could possibly be detrimental.'' Mulally, who said Dearborn, Michigan-based Ford isn't yet running out of money, said he expects that the bankruptcy of one automaker may lead to the failure of the others. The failure of GM would cost the government as much as $200 billion should the biggest U.S. automaker be forced to liquidate, Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts, estimates. A GM collapse would mean ``more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits,'' he said Nov. 15. Aid will likely be delayed until Congress attaches more conditions, JPMorgan Chase & Co. analyst Himanshu Patel in New York wrote in a report today. ``The tone of the hearing conducted on behalf of the Senate Banking, Housing and Urban Affairs Committee and the direction of questioning did not change our view that federal aid is more likely than not,'' Patel wrote. ``However, we feel it is clearer now that the timing of any such aid is not imminent as key differences remain amongst influential power-brokers.''