Automakers' Bankruptcy Would Cost Taxpayers Four Times More Than Bailout, Study Finds
December 08, 2008

By Michelle Krebs

A bankruptcy filing by General Motors and Chrysler would cost U.S. taxpayers four times more than the amount of federal bridge loans being considered this week by Congress, a new study finds.

A bankruptcy, or even a prepackaged restructuring outside of bankruptcy court, cannot control a wild card unique to automakers -- the car-buying consumer -- noted a joint study by international consulting firm BBK and Michigan-based Anderson Economic Group.

Bankruptcy or anything resembling it "scares consumers away," said BBK's Kriss Andrews, BBK's managing director and automotive practice lead, said at a media briefing Monday.

Even the talk of bankruptcy is already "a very serious problem" with consumers, said Patrick Anderson, principle and CEO of Anderson Economic Group. "Consumers are reading front-page speculation about possible bankruptcy and -- no one can blame them -- but they're not buying cars from domestic automakers."

Anderson said consumers are already wondering where they should buy and what will happen to the warranty on their new car. "If we don't get this solved quickly and the automakers end up in bankruptcy, it'll spiral to a much bigger problem."

Bridge Loans Preferred Over Bankruptcy, Even Prepackaged Kind

A team of financial experts from Anderson Economic Group and BBK produced a comprehensive analysis of the taxpayer costs of the federal bridge financing requested by Detroit's automakers compared with the likely costs of a bankruptcy declared by one or more of the same manufacturers.

Their conclusion was bankruptcy would cost four times more than the requested bridge loans along with the continued restructuring of the automakers that has already been in the works. The study used $30 billion in bridge loans and estimated half of that amount would be repaid to taxpayers in two years.

The study concluded Chapter 11 bankruptcy, which protects a company from creditors during a court-overseen restructuring, or even a prepackaged bankruptcy are lousy options for automakers.

Bankruptcy itself is a long and expensive process. Auto supplier Delphi, now going into its fourth year of bankruptcy, is a prime example.

"The bankruptcy court can make a lot of decisions," said Andrews. "But bankruptcy judges can't tell people who to buy cars from. And if people don't buy your products, you're out of business."

Andrews notes that a prepackaged bankruptcy is good in theory but getting it done is a different matter because of the complicated and interlinked nature of auto companies, suppliers and their franchise holders. The odds of getting all of an automakers' constitutents lined up are low. In addition, in the current environment of tight credit, obtaining financing required for a restructuring is unlikely as well.

"Bankruptcy is an experiment we don't know the end of," said Andrews. "In this office, we don't like to conduct experiments with unknown outcomes."

Anderson added that he believes with a restructuring outside of the bankruptcy courts and with the help of government bridge loans, the U.S. will continue to have two if not three automakers, albeit smaller, but with desirable products they can sell at a profit.

"Going down the bankruptcy road and going down the bridge loan road don't get you to the same place," he said.

In response to Sen. Chris Dodd and others calling for the resignation of General Motors CEO Rick Wagoner and other strings that might be attached to government loans, Anderson warned that business decisions should be made by business people. "We're assuming the strings attached will be financial ones," he said. "If they become Political Motors versus General Motors or Chrysler, we will not have successful automakers."

One only has to look across the Atlantic to the U.K.'s British Leyland which was run by the government and "almost all of its storied brands died," Anderson pointed out.

Supplier Base Toppled

One of the biggest costs of a bankruptcy by one or more automakers would be in the toppling of the auto supplier base -- a cost the study estimates could be $36 billion in direct cost to taxpayers. An automaker bankruptcy filing would immediately force auto suppliers to shut down and file bankruptcy or liquidate. Since suppliers are largely shared by all automakers, auto production in the U.S. would be eliminated within days, said BBK's Andrews.

"The contagion would spread so quickly the government would have no choice but to act then," said Andrews.

Beneficiaries? Bankruptcy Lawyers

Among the only beneficiaries of a bankruptcy filing by one, two or three of Detroit's automakers would be bankruptcy lawyers. The study, using the fall of energy giant Enron as a basis, estimated bankruptcy lawyers would receive in the range of $1 billion to $2 billion in fees from automaker bankruptcies. And that excludes the accountants, auditors and investment bankers that would be involved.

Posted by Michelle Krebs at 7:37 AM under Analysis , Chrysler , Companies , Featured , Ford , GM | Comments (1) | digg this | Seed Newsvine

Technorati Tags: andersoneconomicgroup, bbk, bigthree, chrysler, detroitautomakers, detroitthree, federalbailout, ford, frederalbridgeloans, generalmotors, krissandrews, patrickanderson