The view that the Detroit big three should be pushed into Chapter 11 bankruptcy, and not simply be bailed out by the US government, is growing.

The big three argument against this, apart from the general view that they only need a helping hand, is twofold.

One is that it is very hard to get debtor-in-possession financing at the moment to allow an orderly Chapter 11 bankruptcy to proceed. If they are not rescued, their argument goes, they face the harsher Chapter 7 bankruptcy, and chaotic liquidation.

The second argument is that any form of bankruptcy will be counter-productive because people will stop buying vehicles from any company in bankruptcy. They will not believe that any warranty or servicing agreement will be honoured in future.

The first argument is weak since the government could provide financing for Chapter 11 rather than trying to keep the companies going in the present form. That would provide more assurance that a big restructuring would take place.

The second argument has more weight, but not enough to be a barrier. Americans are already used to travelling on bankrupt airlines - although that involves a shorter-term contract - and, if all of the big three are thrust into Chapter 11 at the same time, any stigma would probably be reduced.

Andrew Ross Sorkin, the New York Times business columnist, comes down in favour of Chapter 11 this morning, and has an interesting analysis of how the restructuring of a combined General Motors/Chrysler might work.

It would involve shedding several brands, possibly including the Chrysler brand itself, and reducing capacity heavily. There are lots of entrenched interests that would fight that, notably GM and Chrysler dealers, but it has the ring of necessity.

November 18, 2008 5:58pm in Autos | Comment