February 18, 2009 at 3:27 pm

Bankruptcy word won't go away

Rick Wagoner, chairman and CEO of General Motors, is trying to keep the automaker from filing for bankruptcy, at a cost of $86 billion. (David Guralnick / The Detroit News)

WASHINGTON -- General Motors Corp. and Chrysler LLC laid out in stark terms Tuesday the costs of a bankruptcy filing amid the mounting financial woes of the domestic automakers.

The two automakers say they would need a combined $49 billion in government financing to enter bankruptcy court, quickly win concessions from unions and bondholders and emerge in as little as two months.

The option -- opposed by the automakers -- was studied at length in recent months by the automakers and remains an option of last resort if the Treasury Department isn't willing to give billions more to GM and Chrysler by March. Both automakers have hired bankruptcy advisors.

GM laid out three bankruptcy scenarios in its 117-page submission, warning that a bankruptcy could cost the federal government as much as $86 billion, and could have other painful effects on suppliers, dealers and consumers.

The quickest option for GM -- a pre-packaged bankruptcy -- would require government financing of $25 billion and would nearly wipe out shareholders. The second option is a "pre-negotiated cram-down plan" where GM would seek to wipe out more debt with new shares of stock than under the first option. It could take between 90 days and six months and could require up to $37 billion in government financing.

The third traditional bankruptcy route can take two years or more to negotiate an exit and could cost the government in total up to $86 billion.

Chrysler said it would need the government to provide it with $24 billion in debtor in possession financing.

Chrysler warned that a bankruptcy would have "severe social and economic consequences for both Chrysler and the broader U.S. economy." The Treasury Department might get as little as 3 percent of its $4 billion back if it were forced into bankruptcy, Chrysler said.

If the government refused, Chrysler would be forced to liquidate over the next 24 to 30 months. Chrysler would close 29 manufacturing facilities and 22 parts depots immediately, putting 40,000 U.S. employees of Chrysler out of work. It would also force the closure of 3,300 dealers with 140,000 employees.

Chrysler would leave $7 billion in outstanding auto supplier invoices unpaid.

The strongest argument both automakers make in opposition to bankruptcy is that a filing would cost the government far more -- and place hundreds of thousands of jobs at risk -- in a fragile economy. It might scare away many customers wary of buying vehicles from a bankrupt company, citing concerns about warranties and replacement parts.

But bankruptcy experts say a bankruptcy filing may be unavoidable, especially if auto sales remain at near record-lows.

The strongest argument for bankruptcy is that it would give the automakers a court-overseen process that would force its unions and bondholders to accept massive concessions, allowing the companies to emerge smaller and leaner and with a more manageable debt structure.

Many in Congress and some experts argue that bankruptcy is the only way to force the concessions necessary. If the bondholders and UAW haven't agreed to concessions by March 31, Treasury Secretary Timothy Geithner could call back the loans the automakers have received.

"An extremely weak sales environment, the terms and conditions of the loan agreements themselves, and the deeply distressed supply base may make a Chapter 11 filing by one or both companies impossible to avoid," bankruptcy attorneys at Plunkett Cooney said in a report Tuesday.

The automakers will continue to shrink. GM -- which had 195,374 employees in 2000 -- will shrink to 72,550 by 2012, a loss of more than 120,000 jobs though some were lost through divesting units.

GM will see its manufacturing plants cut almost in half from 59 in 2000 to 33 by 2012.

President Barack Obama's spokesman, Robert Gibbs, told reporters aboard Air Force One on Tuesday that he wouldn't rule out bankruptcy for the Detroit automakers, noting "there are different paths that can be chosen."