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Obama Transition Said to Consider a ‘Prepack’ Auto Bankruptcy
By Linda Sandler and Jeff Green



Nov. 21 (Bloomberg) -- President-Elect Barack Obama‘s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.

Obama’s team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University’s law school who heads Obama’s economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.

U.S. lawmakers yesterday postponed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout as an alternative. Automakers such as GM could use court protection to reduce debt and reject unfavorable contracts.

“It creates the environment to deal with GM’s problems but limits government financial commitment,” said bankruptcy lawyer Mark Bane of Ropes & Gray in New York.

Tarullo referred the matter to the transition team press office. Team spokeswoman Stephanie Cutter said, “We have not put out anything specific for the auto industry except that something needs to be done immediately.”

GM, the largest U.S. automaker, said it might run out of cash as early as the end of the year and that the risk was even greater by mid-2009. GM Chief Executive Officer Rick Wagoner said this week GM would have to liquidate if it went into bankruptcy.

The automaker probably has weeks rather than months left before it runs out of money unless it gets federal aid, Jerome York, an adviser to billionaire Kirk Kerkorian and a former GM board member, told Bloomberg Television yesterday.

How Prepacks Work

In a prepackaged bankruptcy, an automaker would go into court with financing in hand after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed. The process might take six to 12 months, compared with two to five years if the automakers followed an ordinary Chapter 11 proceeding and worked out agreements under a judge’s supervision, Bane said.

Automakers would have to depend on government financing to restructure in bankruptcy court and probably couldn’t attract private loans until they were ready to emerge from the process, Bane said.

Officials of the three automakers told members of Congress this week that they had studied a pre-arranged bankruptcy, championed by Republican lawmakers such as Senator Bob Corker of Tennessee, before dismissing the idea as unworkable.

“We have looked at all aspects, whether it’s a prepackage, whether it’s prenegotiated,” Chrysler CEO Robert Nardelli told a Senate committee on Nov. 18. The options are all “more negative” than restructuring as a condition of receiving federal aid, he said.

Prepacks Rejected

Wagoner and Alan Mulally, CEO of Dearborn, Michigan-based Ford, also said under congressional questioning that their companies had studied and rejected the idea of reorganizing under court protection.

House Speaker Nancy Pelosi said yesterday that Democrats reject bankruptcy as an option. (oops...)

In or out of court, automakers will have to submit a viable business plan to gain government funds, Peter Peterson, senior chairman of Blackstone Group LP, said in an interview.

“Unless they can show us the plan, we can’t show them the money,” Pelosi said yesterday.

GM, Ford and Chrysler must submit viability plans by Dec. 2, and Congress would meet the week of Dec. 8 to consider aid, Senate Majority Leader Harry Reid said yesterday. Congress must see accountability from automakers, Pelosi said.

The congressional deadlock was triggered by disagreement over how to pay for the $25 billion the Big Three automakers are seeking.

Democrats’ Position

Democratic leaders have demanded that the recently approved $700 billion bank-rescue fund be tapped for the auto aid. Their plan stalled with opposition from Republicans and President George W. Bush‘s administration.

The Bush administration joined Levin, Missouri Republican Senator Christopher Bond and others pushing the alternative that would tap the fuel-efficiency loans instead.

“There are other alternatives” to a bridge loan for automakers, Senate Financial Services Chairman Christopher Dodd, a Connecticut Democrat, told reporters yesterday. “The prepackaged bankruptcy is not an idea without constituency here.”

A GM bankruptcy is the “only way” for the biggest U.S. automaker to end union costs that make it uncompetitive, Republican Senator James DeMint of South Carolina said in an interview on Bloomberg Radio.

‘Logical Step’

“I look at the Republicans that say it shouldn’t be saved and should be in Chapter 11, and I agree with that,” said James Harris, President of Seneca Financial Group Inc., a restructuring advisory firm in New York. “I look at the Democrats that say these businesses are very important to the economy, and I agree with that, so the logical step is a prepack,” with some government financing, he said.

Treasury Secretary Henry Paulson said the $700 billion of the Troubled Asset Relief Program shouldn’t be used to rescue automakers. “There are other ways,” he said at a Nov. 18 House hearing. Treasury Department spokeswoman Brookly McLaughlin declined to comment on the prepack proposal.

The collapse of GM would cost the government as much as $200 billion should the biggest U.S. automaker be forced to liquidate, Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts, estimates.

A GM failure would mean “more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits,” Behravesh said Nov. 15.

‘Scary’

The domino effect could be “scary,” said bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf who teaches corporate reorganization at Harvard Law School and the University of Michigan Law School.

Bankruptcy would trigger failures of auto parts suppliers and dealerships, he said. Securitized auto loans and their insurers would fail, creating ripples through the credit markets, he said.

“The difficulty is assuring the American people that the bailout money won’t simply defer the company’s failure for six to 12 months,” Bienenstock said.

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In or out of court, automakers will have to submit a viable business plan to gain government funds, Peter Peterson, senior chairman of Blackstone Group LP, said in an interview.

“Unless they can show us the plan, we can’t show them the money,” Pelosi said yesterday.

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That's what I want to see.

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You never will. You may hear some of the minor details, but thats about all you will get. You probably won't ever get that...Just that we implemented the "bailout" package.

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What if this bailout plan doesn't make things better?

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green_titan said:

Most of the people employed by the car companies (machine workers) could work for the next car company that takes their places when these giants go under. The fucks at the top should retire.

If the car companies want to survive, the only thing we should give them money for is developing and producing electric cars. They have the technology, and thats what the public wants. Save the gas for 18 wheelers that can't go electric. Heck, if we gave 3 small electric car companies even 2 billion (ie tesla car company) we would be set.

Should we be bailing out a company that developed an electric car, destroyed it, and then came out 10 years later with the same car again? We could have 10 years of that engineering under our belts!

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Madtowntripper said:

green_titan said:

Most of the people employed by the car companies (machine workers) could work for the next car company that takes their places when these giants go under. The fucks at the top should retire.

If the car companies want to survive, the only thing we should give them money for is developing and producing electric cars. They have the technology, and thats what the public wants. Save the gas for 18 wheelers that can't go electric. Heck, if we gave 3 small electric car companies even 2 billion (ie tesla car company) we would be set.

Should we be bailing out a company that developed an electric car, destroyed it, and then came out 10 years later with the same car again? We could have 10 years of that engineering under our belts!

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Just curious if you listen to NPR.  The last few says NPR has been doing a special on Tesla Motors outlining the exact same points above.

Great stuff, that car sounds amazing.

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Icelander said:

Maybe we're at a point with technology where there will be nothing created without a major down side.

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we're capable of creating engines in challenge vehicles that
manage 9000mpg, it's been around since 1991, we can convert
water to a burnable fuel and still get more than 6000mpg,
there were cars produced in the 50's that managed almost
400mpg on pump gas and even today volkswagon has one that's
capable of more than 300mpg

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