Auto company executives have spent the last two days fruitlessly pleading their case in Congress for at least a $25 billion bridge loan to pull them out of a near-death spiral. To a man, the Big Three executives rejected the idea of filing for bankruptcy even as some lawmakers began to warm to the concept.
Late Wednesday, the Senate canceled a showdown vote on an auto bailout package. But the idea of linking future aid to an accelerated bankruptcy protection plan did not die with it.
“I’m very much attracted to the prepackaged bankruptcy idea,” said Senate Banking Committee chairman Christopher Dodd, D-Conn., who held hearings Tuesday on a bailout. He was referring to a method of seeking Chapter 11 protection whereby a company would negotiate plans with creditors before filing for bankruptcy, thus speeding up the process.
Former Massachusetts Gov. Mitt Romney is behind the forces opposing a $25 billion “bridge loan” for struggling auto manufacturers.
Speaking Thursday morning amid growing signs of gridlock in Congress, Romney said “there’s no question but that if you just write a check, you’re going to see these companies go out of business ultimately.”
He told CBS’s The Early Show that he doesn’t want to see the carmakers go out of business, “but we don’t want them to continue business-as-usual.”
Earlier this week Romney penned an op-ed for The New York Times titled “Let Detroit Go Bankrupt,” in which he argued that if the Big Three automakers get the bailout they are asking for, “you can kiss the American automotive industry goodbye.”
Romney said that, without restructuring, Detroit wont change course from the business practices that have brought them to the brink of collapse. “Detroit needs a turnaround, not a check,” he wrote.
Romney, who unsuccessfully sought the Republican presidential nomination, has ties to Michigan. His father, George Romney, headed American Motors in the 1950s and was later the state’s governor.
“If you write a check, you’re going to see these companies go out of bounds ultimately,” Romney told Early Show co-anchor Maggie Rodriguez. “Instead, we have to help these companies restructure - stay in business, but restructure. Shed the unnecessary costs, make them competitive with the transplants and the foreign cars and by virtue of doing that, make sure they stay in business long-term.”
Romney clarified that by advocating bankruptcy he did not call for the automakers to close up shop, with the thousands of job losses that would ensue.
“Bankruptcy does not mean closing it down, liquidating it or losing any jobs. The course that this industry is on and been on the last couple of decades has been job loss after job loss, losing market share, unprofitability.
These companies have to become cost competitive or they’re going to go away. That’s why it’s so important to help them. Don’t just give them a check and expect them to spend it the way they’ve been spending the last few years.
Former Mass. Gov. Mitt Romney “What I’m talking about is using the court or out-of-court settlement or perhaps special legislation to help these companies get rid of the excess costs that make them noncompetitive, that mean ongoing job losses, and get these companies in a competitive position so they can stay and grow and add jobs. That’s the course.”
Romney said the kind of restructuring that went on at Chrysler under Lee Iacocca in the 1980s is what has to take place. He said the targets would be excess costs connected to labor, retirees and real estate. “Helping them shed these costs is what is essential,” Romney told Rodriguez. “These companies have to become cost competitive or they’re going to go away. That’s why it’s so important to help them. Don’t just give them a check and expect them to spend it the way they’ve been spending the last few years.”
What Is “Prepackaged Bankruptcy”?
Lately, the term “prepackaged bankruptcy” has been gaining currency in the halls of Congress as lawmakers struggle with pleas for help from the auto industry.
The idea, embraced by some Democrats and Republicans, would extend taxpayer help in exchange for a company undergoing an accelerated Chapter 11 reorganization. The arrangement could represent a model, or a deterrent, for any other strapped companies considering seeking government help.
Bankruptcy protection has worked before to turn debt-saddled companies in the steel, airline and retail industries into leaner and meaner successes. But a frozen credit market and the rigors of a Chapter 11 reorganization make it a difficult option for struggling companies and an unpalatable solution for many lawmakers.
Simply put, a Chapter 11 bankruptcy lets a company stay alive by paying off creditors over time, retaining control of its assets and reorganizing. In the process, they raise capital, downsize and renegotiate contracts to stay alive.
It’s what United Airlines did in 2002. The company filed for Chapter 11, shrank its fleet, cut 26,000 jobs and reduced wages for the rest of its work force. In 2006, it successfully emerged from bankruptcy protection.
But the current financial crisis has changed the bankruptcy terrain. With credit markets frozen, companies would not find easy access to financing. That’s why, even as some lawmakers insist that General Motors file for bankruptcy, they acknowledge that federal aid should be part of the package.
New York bankruptcy lawyer Mark Bane recommends that government assistance would serve best during the prepackaging process, leveraging the company’s negotiations by setting an expiration deadline on the aid.
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