March 10, 2009 at 1:00 am

Commentary: Bankruptcy best aids GM, Chrylser

Grossman )

The time has come to stop the fear-mongering and face facts: General Motors and Chrysler are racing fast toward insolvency and bankruptcy filings.

That's not a bad thing. Bankruptcy is better than the alternative, another government bailout, which two auto task force advisers to Treasury Secretary Tim Geithner were evaluating Monday in a visit to Detroit.

There was an argument to be made in October and November that the companies were unprepared for a filing and that the results could have been catastrophic. After months of planning and laying the groundwork, that's no longer the case.

An orderly bankruptcy promises protection and power. From the moment of filing, a company receives protection from its debts, giving it room to reorganize. It then has the power, which it lacks outside of bankruptcy, to reduce its debts, modify its contractual obligations and force stakeholders to accept reasonable and necessary concessions.

GM in particular has had a tough time convincing its creditors to exchange debt for stock in the company. In bankruptcy, however, it can cram down certain kinds of debts over creditors' objections and force creditors to take a stake in its future.

Compare that with the experience of GMAC, GM's finance arm. Even with billions of government dollars at stake, it couldn't persuade some of its biggest creditors to make a deal. That's exactly the situation that GM is in today.

Labor concessions are also needed. While the United Auto Workers has agreed to incremental give-backs, it's been unwilling to accept bigger pay cuts that put labor costs in line with foreign competitors'. And nobody has been brave enough to put the industry's stifling, phone-book-thick work rules on the table.

That changes in a Chapter 11 reorganization. The law gives the bankruptcy judge the power to make changes that are necessary to achieve viability. That might include scrapping plant-level work rules in favor of the more flexible approach taken at New United Motor Manufacturing, a Toyota and GM joint venture in California that regularly wins awards for its innovation and productivity.

A similar section of the law allows changes to retiree benefits.

Bankruptcy also provides the tools for an automaker to shut underperforming brands and rapidly shrink its dealer network. Outside of bankruptcy, state-level laws make these changes expensive and time-consuming. Shuttering Oldsmobile, the most recent example, cost GM more than $1 billion and took more than four years, from start to finish (not counting the dealer lawsuits that are still pending).

Within Chapter 11, those state laws lose their bite. At the least, GM could sell or turn out the lights on Saturn and Pontiac -- something the automaker considered in its February restructuring plan that targeted Saturn for gradual elimination and Pontiac for shrinking. Both GM and Chrysler could focus their sales operations on the most profitable dealers, saving billions of dollars in marketing and logistics while improving customer experience.

Against all these benefits, the objections to using bankruptcy to revitalize the industry are weak. The chief, voiced often by GM officials, is that sales would collapse because consumers wouldn't purchase cars from a bankrupt company. It's hard to take this claim seriously, considering how much those officials have already done to convince the nation of their company's dire finances. If anything, savvy consumers would see bankruptcy as a serious step -- more so than begging for government dollars -- toward long-term viability.

Further, consumers have shown little reluctance to deal with other companies going through reorganization in bankruptcy -- including most of the big airlines, even though some commentators predicted consumers wouldn't trust them to maintain safety. And the automakers could take steps to provide further assurance, like providing third-party warranties and (following Ford's lead) setting clear milestones for reorganization and sticking to them.

The other big objection is that the parts network would collapse, damaging the entire industry. But there's no reason to believe the bankruptcy judge wouldn't move fast to make sure suppliers get paid and remain in business.

In its own way, GM acknowledges that bankruptcy is workable and has real promise. Its latest turnaround plan concedes the company could get through the process in a few months and achieve tens of billions in savings, but rejects the option on the assumption that sales would dive. Tone down that assumption, and the numbers come out strongly on the other side.

The real reason GM and Chrysler want to stay out of Chapter 11 is that it would force them to make real, disruptive changes -- especially, perhaps, in the executive suites. And Cerberus, the private-equity behemoth that owns Chrysler, would see its stake diluted or wiped out.

Those whose chief concern is the future of the U.S. auto industry shouldn't share the executives' trepidation. Bankruptcy may be the industry's best bet for revitalization and long-term sustainability. And it may happen whether the executives welcome it or not.

Andrew M. Grossman is senior legal policy analyst at The Heritage Foundation in Washington.