Want a federal bailout? Why not bankruptcy, too?

[November 20, 2008]  WASHINGTON (AP) -- What's so bad about bankruptcy as an alternative to big bailouts for automakers or other critical U.S. companies? Frozen credit and the hardships of a Chapter 11 reorganization make it a tough pill to swallow for struggling industries and their workers.

Yet these days, more and more lawmakers are promoting bankruptcy as a condition for a government helping hand.

After all, it has worked before to turn debt-saddled companies in the steel, airline and retail industries into leaner and meaner successes.

For now, the talk has centered on Detroit's beleaguered automakers. Company executives have spent the last two days fruitlessly pleading their case in Congress for at least a $25 billion federal bridge loan to pull them out of a near-death spiral. To a man, the Big Three executives rejected the idea of filing for bankruptcy even as some lawmakers began to warm to the concept.

Late Wednesday, the Senate canceled a showdown vote on the auto bailout package. But the idea of linking future aid to an accelerated bankruptcy protection plan did not die with it.

"I'm very much attracted to the prepackaged bankruptcy idea," said Sen. Christopher Dodd, D-Conn., who held auto bailout hearings Tuesday as chairman of the Senate banking committee. He was referring to a method of seeking Chapter 11 protection whereby a company would negotiate plans with creditors before filing for bankruptcy, thus speeding up the process.

"I believe their best option would be some type of Chapter 11 bankruptcy, where they can renegotiate -- get rid of the management," the banking committee's ranking Republican, Richard Shelby of Alabama, said Wednesday on CBS' "Early Show.

Simply put, a Chapter 11 bankruptcy lets a company stay alive by paying creditors off over time, retaining control of its assets and reorganizing. In the process, it raises capital, downsizes and renegotiates contracts to stay alive.

It's what United Airlines did in 2002. The company filed for Chapter 11, reduced the size of its fleet, cut 26,000 jobs and reduced wages for the rest of its work force. In 2006, it successfully emerged from bankruptcy protection.

But the current financial crisis has changed the bankruptcy terrain. With the credit markets seizing up, companies would not find easy access to financing. That's why, even as some lawmakers insist that General Motors file for bankruptcy, they acknowledge that federal aid should be part of the package.

New York bankruptcy lawyer Mark Bane recommends that government assistance would serve best during the prepackaging process, leveraging the company's negotiations by setting an expiration deadline on the aid.

Still, bankruptcy is tough medicine. While creditors, suppliers, and management take a hit, so do a Chapter 11 company's workers. Besides cutting jobs and cutting pay and benefits, United Airlines also eliminated its pension plans.

Labor unions wince at the idea. Testifying before Congress last year, AFL-CIO Treasurer Richard Trumka decried a bankruptcy system that he said "has become effectively a device for the wholesale transfer of wealth from workers to other creditors."

When Dodd asked United Auto Workers president Ron Gettelfinger this week whether prepackaged bankruptcy backed up with federal guarantees was any more palatable, Gettelfinger cited risks to pensions and to retirees who could lose health benefits and are not yet eligible for Medicare.

And House banking committee chairman Barney Frank, appearing with Shelby on the Early Show, dismissed the bankruptcy idea. "We already have too much union busting," he said.

What's more, auto executives argued that the stigma of bankruptcy would drive customers away, eliminating a Chapter 11 company's share of the market.

With an auto bailout dead for now, the bankruptcy debate is likely to rear up again next year.

President-elect Barack Obama had urged the Bush administration and Congress to find a way to help the General Motors Corp., Chrysler LLC and the Ford Motor Co. In an interview with CBS's "60 Minutes" that aired Sunday, he indicated that bankruptcy may not be the answer.

"What we have to do is to recognize that these are extraordinary circumstances," he said. "Banks aren't lending as it is. They're not even lending to businesses that are doing well, much less businesses that are doing poorly. And in that circumstance, the usual options may not be available."

Robert Reich, who was Labor Secretary under President Clinton and is now on Obama's board of economic advisers, has suggested that even if a company receiving federal aid does not seek Chapter 11, it should pay a similar price. "In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under Chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts," he wrote in his blog last week.

Jack Williams, a professor at the Georgia State University College of law and resident scholar at the American Bankruptcy Institute, said that could create too much uncertainty.

"This needs a bankruptcy, not a bankruptcy-like model," he said.

If carmakers do get rescued, even bailout advocates predict that the line of debt-strapped companies seeking help outside the Treasury could be a long one.

Still, not every company has the tentacles of an automaker, and not all would get the same deal.

"It would certainly create requests," Bane said. "I'm not sure that the government would suffer the same political pressure to accede to those requests."

[Associated Press; By JIM KUHNHENN]

Associated Press writer John Dunbar contributed to this article.

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