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Bankruptcy option looms for Big 3

2008-12-19 06:48

Detroit/Washington - The White House said on Thursday it is considering the option of an "orderly" bankruptcy as it weighs aid for US automakers and Chrysler LLC prepares to shut down all of its 30 factories for a month.

The move by the Bush administration injected a new note of uncertainty into the politically charged debate over a bailout for General Motors Corp and Chrysler that is reaching a conclusion after more than a month of wrangling.

In a pair of interviews, US President George W. Bush indicated officials were weighing the option of a managed bankruptcy that would demand sacrifices by stakeholders including management, labour and dealers, as part of an aid package expected to be announced as early as Friday.

Bush told the American Enterprise Institute that he was concerned both about the impact a "disorderly bankruptcy" might have on markets and the question of whether or not US automakers can become viable.

"I'm also concerned about putting good money after bad," Bush told C-SPAN. "And therefore, it's going to be very important that whatever we do, that there be a plan that the autos -- that would be management as well as dealers as well as labour -- show how they could be viable for the future."

Both Chrysler and GM and their political allies have said bankruptcy is not an option since it would risk pushing their suppliers to collapse, driving dealers out of business and compounding job losses at a time when the US economy is already mired in recession.

European, Asian impact

"Bankruptcy, whether it's structured or not, would destroy demand for that company's vehicles and put dealers out of business," Annette Sykora who heads the National Automobile Dealers Association said in a statement.

Meanwhile, the outlook for a near-term recovery in global auto demand dimmed as Europe saw a record fall in truck sales and an industry group warned that Japanese car sales will likely to be the worst in at least three decades next year.

Reflecting the pressure, Toyota Motor Corp may report its first-ever operating loss in the current year ending March 31 as a result of plunging sales and the strength of the yen, the first such loss since it began releasing results in 1940, the Nikkei financial daily reported.

Chrysler, which is seen as the weakest of the three Detroit automakers, has said it needs federal aid to survive into 2009. GM has also requested billions of dollars in immediate help to forestall potential failure.

Ford Motor Co wants a line of credit rather than immediate cash, to guard against a further downturn in its business or a failure of a competitor.

Chrysler was gearing up to shut down all its factories for a month, starting Friday, as it struggles to survive a plunge in vehicle demand that has strained its liquidity.

The White House, which has repeatedly said it wants to help only those automakers that have long-term viability, said the administration was taking into account Chrysler's decision on shutdowns.

There is an "orderly way to do bankruptcies that provides for more of a soft landing," White House spokeswoman Dana Perino said. "That would be one of the options. I'm not saying that is necessarily what would be announced."

Meanwhile, both Chrysler and GM said they had not reopened merger talks with Chrysler's parent Cerberus Capital Management, denying a report in The Wall Street Journal that talks had been revived.

GM and Cerberus suspended talks in late October. GM had pushed for up to $10 billion in US government aid to support an acquisition of Chrysler, according to sources with knowledge of the talks. The discussions were dropped when no financing was immediately available.

GM's troubles also deepened as its former finance arm GMAC, which funds most of GM dealers' wholesale vehicle purchases, appealed to existing bondholders to participate in a debt exchange program that would facilitate the company achieving bank holding company status.

GMAC has said being a bank holding company is the only option for its viability and and has extended the deadline for its debt exchange offer to December 26.

Barclays Capital analyst Brian Johnson said if GMAC were to fail, GM would potentially need an additional $9 billion to $13 billion to support wholesale vehicle purchases by its dealers.

Global woes

Globally, various governments were considering aid for distressed automakers.

The European Commission, as well as individual governments, have pledged support packages to help their carmakers, with France's president, Nicolas Sarkozy, saying on Monday he would consider new forms of assistance, such as loans or guarantees.

The Russian government will also discuss support for its struggling domestic car producers on Friday.

In Japan, the head of the Japan Automobile Manufacturers Association said it was very difficult to call a bottom for the market. The industry group said it expected Japanese demand for new vehicles to fall below 5 million for the first time in 31 years -- the fifth straight year of decline.

Goldman Sachs also issued a gloomy forecast, cutting its global automotive production and sales growth forecasts to 7% from 9% for 2009. The warnings came after Honda Motor Co forecast on Wednesday a six-month operating loss of 190 billion yen ($2.2 billion), sending its shares down 3.5% on Thursday.

In the United Kingdom, business minister Peter Mandelson said late on Wednesday the government was in talks with the owners of Jaguar Land Rover but would not support or run failed companies.

"I don't have an open cheque book," he said.


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