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Tim O'Brien | Dec 20, 2008

Despite the emergency USD$17.4 billion short-term bail-out loans for GM and Chrysler agreed to by the White House yesterday (US time), many analysts predict that bankruptcy for GM and Chrysler is all-but inevitable.

The two giant automakers are in such financial disarray, and burdened with such obligations, that the best that may be achieved with this tax-payer funded lifeline will be 'orderly' bankruptcy, rather than the disorderly collapse that has been in prospect for the past few months.

Following the failure of the Senate to agree to a bail-out package, the Bush Administration has been forced to direct funds to the struggling automakers from the previously agreed (in October) USD$700 billion financial industry rescue package.

Under the plan, USD$13.4 billion will be released to GM and Chrysler by mid-January, with another USD$4 billion available for GM in February. But the loans are short-term bridge loans; GM and Chrysler have until just March 31 to produce a "plan for their long-term profitability".

Putting the acid on GM and Chrysler and ensuring that they are concentrated on the task at hand, is that the loans, overseen by Treasury Secretary Henry Paulson, can be 'called' on just thirty days notice.

chrysler-crash

The difficulty GM and Chrysler face is that as part of the "plan for long-term profitability" they must secure concessions from unions on job losses, wage cuts and cuts to benefits. They are also expected to come to "arrangements" with creditors and suppliers. You can read into that relief from debt obligations.

But few are comfortable with the latest bail-out. Many among the American public, and in the Congress, see the rescue as simply throwing good money after bad. Outgoing President Bush, an adherent to free-market principles, has previously said that failed companies should be allowed fail. The problem, which is soon to be become Mr Obama's headache, is that the US economy is in such dire straits, the collapse of GM or Chrysler would be a catastrophe of unimaginable proportions.

What all are seeking is a top-to-bottom overhaul and restructuring of each of the car makers outside of bankruptcy court. But that may not be possible.

According to the New York Times (19/12), the day before the latest bail-out announcement, Whitehouse spokesperson, Dana Perino, confirmed speculation that the Whitehouse was considering the prospect of "forcing GM and Chrysler into a managed bankruptcy".

dana-perino

"There's an orderly way to do bankruptcies that provides for more of a soft landing," Ms. Perino said. "I think that's what we would be talking about. That would be one of the options."

President-elect Obama, who will take office January 20, said that the US automakers are going to have to "make some hard choices" and must "come up with a plan that is sustainable."

It is such a mess, such a Gordian knot confronting US lawmakers, that it is difficult to predict with any clarity what is likely to happen in the next two to three months. As if to complicate matters further, reports have surfaced on Wall Street that GM is again involved in merger discussions with Chrysler – which GM has refuted, for today at least, a different story may emerge tomorrow.

In the meantime, both companies are slashing production to conserve what's left of their dwindling cash reserves. Chrysler is about to embark on a month-long close-down.

It may be to no avail. At the end of the day, many believe that the only way that GM and Chrysler will achieve the overhaul and restructuring required will be through bankruptcy. Only then will they void their benefits contracts with the powerful UAW, and only then will they find the relief they need from creditors.

saab-for-sale

"It's not going to be easy, it's not going to be pleasant, or palatable, but it's the only solution that makes the least bit of sense," Hugh M. Ray, head of the bankruptcy practice at the Houston law firm Andrews Kurth, told the New York Times (19/12).

It has been widely reported that GM has in recent times retained bankruptcy legal experts to provide specialist advice. In the short term, it will likely sell SAAB – for whatever it can get – and all-but retire the Pontiac brand (which will likely be bad news for Holden's G8 export program).

And, as we have commented earlier on these pages, Chrysler, in our view, is as good as gone. Its restructuring plan will be a break-up. There will be buyers out there. GM will take a chunk with Federal support. Maybe even Mahindra & Mahindra will realise a long-standing unstated ambition and take Jeep off its hands.

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