What if the auto industry went bankrupt

Such a scenario would have impacted hundreds of related businesses and tens of thousands of jobs. The long-term view remains unclear. If the new regulations are not revised — the industry can revisit and potentially limit the mandate prior to — it will likely bankrupt OEMs and suppliers alike; technology is expensive and requires firms to generate great and continuous profits internally without subsidies and without living off higher burdens placed on sorely beleaguered American taxpayers.

Detroit and Michigan have historically epitomized the virtues of Yankee ingenuity, solving the most formidable technical and financial challenges of the marketplace.

Sign in. Log into your account. Sign up. Password recovery. Forgot your password? Get help. Create an account. DBusiness Magazine. Business Features. Facebook Comments. Career Boost. Digital Deals. Big Three Auto Executives Stellantis. November 1, A week later, lame-duck President George W. Bush and Treasury Secretary Henry Paulson intervened.

Announcing that the administration would offer the automakers loans with terms similar to the ones Congress had voted down, Bush gave GM and Chrysler three months to develop restructuring plans and prove they could become viable companies.

In March , when the lifeline extended by the Bush administration had run out, President Obama stepped in. In exchange, the companies received another and even larger round of government loans. But in spite of the generous loans, extensions, and second chances, the Obama administration finally concluded that the companies' restructuring plans were insufficient.

In the spring of , it directed both automakers to proceed into Chapter 11 bankruptcy — Chrysler filed on April 30, and GM on June 1. In both cases, bankruptcy involved creating new companies — the so-called "new Chrysler" and "new GM" — in which the federal government would have a significant stake, and to which the bulk of the assets of the original companies including all of their plants, equipment, brands, and trademarks would be sold. The original companies, meanwhile, would settle their obligations to creditors and shed those assets that would not be transferred to the new companies.

Their shareholders would be all but wiped out. The automakers' house-cleaning didn't take long; within two months of filing, each company had emerged from its bankruptcy.

By the summer of , the new General Motors was a somewhat smaller and leaner company, having shed about a third of its American work force. Both GM and Chrysler have significant operations and large work forces in Canada; the Canadian government, facing pressures similar to those exerted on lawmakers in the U.

The idea was for the companies to go public within a few months, at which point the U. To the Obama administration, and to many other champions of the auto bailout in Congress and the press, the story outlined here is one of extraordinary success. Then-speaker of the House Nancy Pelosi echoed his view, arguing: "In the midst of a severe recession, congressional Democrats and President Obama took difficult emergency action to rescue American auto companies and strengthen critical pillars of our manufacturing sector, while protecting taxpayers.

Of course, this "success narrative" is based on a particular reading of the events surrounding the bailout. According to that reading, the nature of the '08 financial crisis — as well as the economic importance of the auto industry — meant that the government simply could not let GM and Chrysler go under. But at least the unprecedented cooperation between the government and the automakers was undertaken in a deliberate, careful way — using the government's special authority to contend with the economic crisis in order to guide the companies through an orderly re-organization rather than the dreaded chaotic collapse.

As a result, the companies were saved, and now they have a chance to thrive again. The first premise of the "success story" narrative is that, if not for the bailout, General Motors and Chrysler would have been liquidated — causing the loss of many thousands of jobs at those companies and reverberating throughout the industry at the cost of many thousands more.

The disappearance of GM in particular — with its roughly , American employees and its central place in the chain of suppliers, parts manufacturers, and dealers — would have marked the end of the American automobile industry. Just before the bailouts, reporters heard much the same case made by officials in the Bush administration.

But this nightmare scenario was never likely to happen. In the absence of a bailout, GM and Chrysler would each have been forced to file for bankruptcy like any other company in their circumstances. It is possible that Chrysler would have then faced liquidation though even this is questionable, given the value of its assets and its brands.

General Motors, however, would almost certainly have been re-organized. In all likelihood, this re-organization would have produced a company more competitive than the one that emerged from the bailout process. Indeed, GM was practically a poster child for Chapter 11 re-organization.

The roots of our approach to such re-organization go back to the 19 th century — when creditors of railroads that were unable to meet their debt obligations threatened to tear up the rail companies' tracks, melt them down, and sell the steel as scrap.

Innovative judges, lawyers, and businessmen recognized that creditors would collect more over time if they all agreed instead to reduce their claims and keep the railroads running, thus allowing the companies to produce revenues to pay off their debts. This same logic animates Chapter 11 of the bankruptcy code today.

To understand why GM was an obvious candidate for Chapter 11 re-organization rather than liquidation , it is important to start with the fundamental issue facing any firm filing for bankruptcy — the question of whether it is "economically failed" or simply in "financial distress. For example, if a typewriter manufacturer were to file for bankruptcy today, it likely would be considered an economically failed enterprise: The market for typewriters is small and shrinking, and the manufacturer's financial, physical, and human capital would probably be better used elsewhere perhaps in making computers.

A financially distressed enterprise, on the other hand, is worth more alive than dead: It may have fallen on hard times — the result of mismanagement or an economic downturn, perhaps — but still provides a product or service that is in demand and so could someday make for a thriving firm. Through the use of Chapter 11, such a company can continue to operate while re-organizing to get out from under its debts.

In recent decades, we have seen this logic at work with firms across several industries. Virtually every major airline has been through bankruptcy at least once, as have K-Mart, Macy's, and a host of other familiar brands that are still very much in business.

Others have filed for bankruptcy and disappeared — Montgomery Ward, TWA, and Enron, for instance, were found to be economically failed and so were liquidated.

In late , General Motors was a classic case of a financially distressed rather than an economically failed enterprise. It had a skilled and experienced work force, a stable of longstanding and well-respected brands, and an extended system of relationships with suppliers and customers — all of which illustrated both its underlying value and potential.

But the company also had several major financial liabilities: expensive labor contracts, massive legacy costs for pensions and health care, and an outdated and overgrown distribution system of dealerships that needed to be streamlined. A Chapter 11 re-organization would have given GM an opportunity — perhaps its only opportunity — to cut loose this dead weight.

The only obstacle to such a restructuring might have been the requirement that a re-organizing company obtain so-called "debtor in possession" financing — loans of funds it can use in the actual process of re-organization, and which receive first priority in repayment.

Some have argued that, in light of GM's size and the instability in the credit markets at the time, the automaker might not have been able to secure such loans. While this may be true, a reasonable argument could be made that, under those circumstances, it would have been appropriate to use funds from the Troubled Asset Relief Program to lend or guarantee debtor-in-possession financing to GM.

After all, the purpose of TARP was to address liquidity problems in lending markets and to stave off bank runs that might have threatened the stability of solvent institutions. And any failure by GM to obtain debtor-in-possession financing would have been attributable to such liquidity problems in the lending markets.

Devin Scillian is equally at home on your television, on your bookshelf, and on your stereo. Devin anchors the evening newscasts for Local 4. Additionally, he moderates Flashpoint, Local 4's Sunday morning news program. He is also a best-selling author of children's books, and an award-winning musician and songwriter. Published: July 28, pm. About the Authors:. Chrysler is only getting half that time to work out a combination with Italian automaker Fiat.

If they fail, the government will force them into bankruptcy court. Americans have grown used to the bankruptcy of airlines, retailers and other businesses. But a bankruptcy of one or more of Detroit's Big Three could have a much more wide-ranging impact on the U.

Here's what a bankruptcy could mean for car owners, dealers, auto workers, suppliers, lenders and U. The government has announced it will stand behind the warranties for new GM and Chrysler cars.

But that would do little good to somebody trying to sell a model that winds up being discontinued. The loss in resale value could be tremendous.

After GM and Chrysler killed off Oldsmobile and Plymouth, two-year old vehicles of those discontinued brands were worth as much as a similar five-year old model at the companies' other brands, according to used car price tracker Kelly Blue Book. And if either company was forced to go out of business due to bankruptcy, it would cost people a lot more to buy a new car. Even with demand for new cars at a year low, a shutdown of all GM or Chrysler plants could soon create a shortage of new cars.

Jesse Toprak, industry analyst with sales tracker Edmunds. The popular assumption is that bankruptcy would give GM the power to get out of their labor contracts with the United Auto Workers union and other unions that put them at a competitive disadvantage to nonunion automakers such as Toyota Motor TM.

The truth is far more complicated. The threat of bankruptcy gives management far greater leverage at the negotiating table. But the legal process is cumbersome enough that management at bankrupt companies typically find it quicker to reach a new labor deal than have the court impose one.