Rescue
The federal government can come to the rescue. There are definitely those that frown on such a course of action, feeling that a company or industry should sink or swim through the free-market forces. That being said, a government bailout has precedent. In 1979, Chrysler was bailed out by the federal government. More recently, the financial industry has benefited by a more benevolent Uncle Sam. So far in 2008, the federal government has approved several bailout packages, both big and small, for companies within the financial-services industry.
Of course, a bailout can come in many forms and with several stipulations and conditions. There are several plans being tossed around Washington in regard to the auto industry.
Bankruptcy
If the federal government fails to take action, the most likely consequence for the big-three auto companies is bankruptcy. Even this consequence, however, can take many forms:
- A Chapter 11 business bankruptcy is a federal, judicial proceeding. Rather than congress formulating a strategic plan for the auto companies in exchange for a loan/rescue package, the judicial branch of the federal government would oversee a reorganization plan negotiated by the company, its shareholders and creditors. The aim of Chapter 11 is to make the company profitable again. In other words, the company will be restructured to improve efficiency and a plan will be created toward making some payment to creditors.
It should be noted, however, that the companies’ debt and labor contracts can be partly or wholly discharged. The process can also take years and taint consumer perception, resulting in lower consumer confidence at a time when the economy in general has already taken its toll.
- A pre-packaged bankruptcy is a truncated approach to Chapter 11. In other words, the reorganization plan is negotiated with creditors and stockholders and financing is determined before the company files for bankruptcy. This option saves the company time and money.
- A Chapter 7 Bankruptcy, on the other hand, is simply a liquidation of business assets. In other words, a bankruptcy trustee is appointed to oversee the sale of the company's assets. The proceeds will be distributed to the company’s creditors. Some commentators, including The New York Times’ contributor, Spencer Abraham, argue that a Chapter 11 bankruptcy for any of the big three will undoubtedly lead to a Chapter 7 liquidation, which could in turn result in Chapter 7 liquidations of auto-industry suppliers and/or dealerships.
