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 It's back to the drawing board for General Motors Corp. and Chrysler LLC. The two automakers may be able to put off filing for bankruptcy for a few months, but according to Jeff Marwil, an attorney at law firm Winston & Strawn LLP, the government's $17.4 billion short-term loan package could be a waste. While the deal immediately gives the companies $13.4 billion in loans,
with another $4 billion likely available in February, the companies
still have to restructure extensively, and filing for bankruptcy may be
the only way to do that.
"There is a great potential that they
could be throwing away good money," Marwil explained. "GM and Chrysler
may use this funding to ready themselves to file for bankruptcy."
GM and Chrysler have already announced dramatic steps to cut costs. Chrysler is closing 30 factories in the U.S. and Canada for at least a month. Detroit-based GM is halting work on a $370 million plant in Flint, Mich., that was to manufacture the backup engine for its Volt plug-in hybrid car. "I think this package is a mistake. I think the best place to restructure the auto companies is in the bankruptcy court. It's the best place for them to restructure. The short-term loan may stall the process and give them time to put a larger global prepackage together for the company to file for bankruptcy," Marwil said. In an episode of Inside The Deal, Marwil explained that any government assistance to the auto industry should come in the form of debtor-in-possession financing after a Chapter 11 filing. Marwil said the companies will most likely be silent on the manner of filing for bankruptcy, but if the companies change the manner in which they are doing business with suppliers or defer payments, there may be negotiations. - Maria Woehr Also see: Detroit Breakdown. Inside The Deal: Winston & Strawn's Jeff Marwil on bankruptcy for GM, Chrysler Winston & Strawn's Jeff Marwil on a GM bankruptcy President Bush gives $17.4B in TARP to Detroit CategoriesComments Deal Video
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"In an episode of Inside The Deal, Marwil explained that any government assistance to the auto industry should come in the form of debtor-in-possession financing after a Chapter 11 filing."
This seems so logical, but still there is the question of any assistance. Bondholders are going to take a cut, taxpayer money is simply reducing the cut, going directly to creditors.
A Treasury DIP financing for auto warranties would make some sort of sense, and achieve something tangible in reassuring auto shoppers the warranties will be honored.