Washington May Be Having Second Thoughts On An Auto Company Bankruptcy

All of a sudden, the prospect of a chapter 11 filing for GM and Chrysler is back. This time with a different twist. The government of the United States is talking about forcing the issue.

What happened? It suddenly dawned on the Washington crowd that they might be a bit too far down the capital stack if things started going south with or both or the two. It turns out that their recent capital injections are junior to a lot of other claims including even the bank lenders to the companies.

Now some of the talk is just posturing. Not much different than any other creditor would say if they found themselves in this situation. Threaten to pull the plug and maybe those with senior claims to yours let you move up. It’s no secret that the talks with the creditors about swapping debt for equity and with the unions about wage and benefits relief are going nowhere. So, this is also partly an attempt to get them off the dime.

I wouldn’t be surprised, however, if the Obama administration has glanced into the bottomless pit that aid to these companies could lead to and decided to back off and reassess the situation. Although the initial capital injection seemed to have at least modest public support, serial bailouts or a much larger injection in round two could quickly turn the electorate quite sour.

I’ve argued from day one that bankruptcy is the way to go. The politics are too convoluted and the interested parties have everything to gain and nothing to lose by turning this into a political issue. There is always the chance that Washington will cave to special interests and opt for the status┬ábankrolled by taxpayer money. If they don’t you end up in a chapter proceeding, so why not hang tough in negotiations.

It’s time to move forward and resolve the issues.

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