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Best Auto Plan: Bankruptcy Terms Minus Bankruptcy

A majority of Americans oppose an auto bailout, but you can be sure that they will be even more unhappy if an auto collapse deepens the already-deepening Great Recession.

[IMGCAP(1)]Even if most Congressional Republicans are determined to have the Detroit auto companies go into Chapter 11 bankruptcy and reorganization, the Bush administration and the incoming Obama administration are convinced it would be a bad idea.

Sixty percent of Americans, according to a Washington Post poll, think that bankruptcy would make no difference or would be good for the economy.

But neither the incoming nor outgoing administration thinks that — mainly because bankruptcy for General Motors could also result in the failure of companies that supply parts for all auto companies, including foreign transplants, causing a collapse of the entire industry.

And the stigma of a Chapter 11 filing by U.S. auto companies — putting them into position for reorganization by courts — might discourage any buyers from purchasing American, causing a cascade into Chapter 7 bankruptcy, that is, liquidation.

All that could add several million people to the unemployment rolls at a time when joblessness is already surging.

Another Washington Post poll found that 43 percent of U.S. households has already suffered from job loss or reduced hours of work and 66 percent are worried that they won’t be able to maintain their standard of living.

Sixty-five percent support the idea of up to $700 billion in infrastructure spending to prop up the economy. That suggests that the 55 percent who oppose an auto bailout don’t understand the potential consequences of bankruptcy.

As Treasury Secretary Henry Paulson told Fox News’s Bret Baier on Tuesday, President George W. Bush “made a decision that he didn’t want to see a failure of an auto company, so we’re right now exploring the options.”

Asked about most Congressional Republicans’ favored process — Chapter 11 reorganization — Paulson said “the economy is fragile. A failure would not be good at this time.”

And Vice President Dick Cheney told radio talk-show host Rush Limbaugh, “if the automobile industry goes belly up, there’s a deep concern that that would be a major shock to the system.”

President-elect Barack Obama endorsed the White House-Congressional Democratic $14 billion bailout package that passed the House last week but failed to survive a GOP filibuster.

The hero of the moment in that exercise — though he ultimately failed to win a victory — was Sen. Bob Corker (R-Tenn.), who sought to fashion a bankruptcy-like reorganization package for GM without bringing on the consequences of bankruptcy.

Corker, a freshman Senator, tried to save everyone involved — the auto companies, their employees, suppliers, the economy and his fellow Republicans — but he came up short because the United Auto Workers and their Democratic allies would not go along with his compromise proposal.

His idea was to force GM’s management, the UAW and company creditors to make guaranteed concessions by a definite date — March 31 — using the threat of certain bankruptcy as a stick to prevent backsliding.

The administration-Democratic plan was similar in outline — and was defended by administration officials as “tough” — but contained no certain terms for keeping the auto companies viable.

Under that plan, Bush would appoint an “auto czar” assigned to work out concessions by March 31 or April 30 or demand that the companies return their bailout loans, resulting in bankruptcy.

Corker determined that the administration terms weren’t definite enough and that his fellow Republicans wouldn’t support it.

So he called for a two-thirds “haircut” by GM’s bond-holders — that is, they’d write down GM’s debt to one-third of its original value — along with requirements that GM’s pension funds convert the company’s obligations into GM stock and that the UAW reduce its pay and benefits package to match Toyota and the other transplants’ average.

Corker, even though he’s a junior member of the Senate Banking, Housing and Urban Affairs Committee, spent hours negotiating with GM, the bond holders and the UAW.

But the UAW wouldn’t agree to the deal, mainly because it figured that it would get an easier deal from the administration and, eventually, a Democratic administration and a heavily Democratic Congress.

Without the union concessions, Senate Republicans blocked the administration bill and Congress went home to let the administration figure out what to do.

The Corker plan remains the best solution for the auto companies. It’s bankruptcy without the stigma of formal bankruptcy. It’s shared sacrifice among the stakeholders to keep their common enterprise alive and limit losses to the economy.

The package also involves limits on executive pay for the auto companies, although it leaves current management in place.

The big question now is: Does the administration have the leverage to obtain tough concessions all around?

Having made it clear it will not let the auto companies fail, Bush & Co. seemingly have given up a big stick in trying to obtain terms — and the UAW simply has to look 30-odd days ahead to see Democratic relief.

Although many conservatives cite unionized auto workers pay at $75 an hour vs. $45 at non-unionized plants, the difference in pay and benefits is actually just $10 an hour — an amount the UAW should be prepared to eat in order to keep its goose laying eggs.

If the Bush administration can’t win bankruptcy-like concessions to keep the auto companies alive for the long run, perhaps it should just make a short-term loan to keep GM and Chrysler breathing until Jan. 20 and let Democrats figure out the longer run.

The danger is that, unions being as powerful an influence on Democrats as they are, the next bailout will just be the first of many and government will end up running auto companies along with the banks. Bankruptcy might be better than that.

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