Bailout or "DIP financing"?

Kathleen Pender, author of the Net Worth column for the San Francisco Chronicle (www.sfgate.com) wrote Thursday that lending $25 billion now would give the government (ie. us, the taxpayer) virtually no control and very low priority to the assets of the three automakers.

Instead, and Lynn LoPucki, professor of bankruptcy law at Harvard and UCLA agrees, Pender favors letting them file Chapter 11 and then provide debtor-in-possession ("DIP") financing. Interestingly the Democrats may in fact force the automakers to file by taking their two-month holiday now, rather than voting on the bailout.

But the point she makes is the automakers don't want this, it gives the lender (us again, the government) too much control and they don't want to give that up. To avoid this they are claiming that Chapter 11 would force them out of business entirely because consumers would stop buying their cars completely. Their compelling line is "this is about a lot more than just Detroit", predicting "it is about saving the US economy from a catastrophic collapse." The loss of jobs would be in the millions they say.

But Pender notes that it would be very unlikely the companies would be liquidated in bankruptcy. "That only happens when a company is sold off in pieces than restructured as a going concern," she says. UC Berkeley bankruptcy law professor Jesse Fried points out that "Chapter 11 was created for companies that can't pay their debts but are still worth more alive than dead."

All admit that many jobs will be lost. On average companies that enter Chapter 11 emerge with about half their former job force. LoPucki says "the employment loss is not caused by bankruptcy. Bankruptcy is simply the recognition that you needed to shrink the business."

Shareholders too, will suffer but both GM & Ford are trading below $3 a share right now anyway (Chrysler is not publicly traded). But top executives are usually replaced (you remember, the CEO's who flew to those hearings in their private jets at a cost of about $20,000 compared to about $600 for coach fare) and most important if we do DIP financing, creditors (again, us, the taxpayer) typically get back some or all of their money.

Unions are forced to renegotiate their contracts in bankruptcy, too. But members of the UAW have benefits that far exceed what most Americans have, Pender says, and maybe that's another necessary sacrifice.

I'm for Chapter 11 here, what about you?