Bridge loan for automakers preferable to bankruptcy, study finds

A $30-billion bridge loan from the government would cost taxpayers $16.4 billion over two years; allowing two of the automakers to slide into bankruptcy would cost taxpayers $65.9 billion, according to a study by two Michigan consulting firms, BBK and Anderson Economic Group.

Even with a government loan, automakers and their suppliers would still have to slash payrolls by almost 500,000 over the next two years, the study estimated. However, Chapter 11 bankruptcy filings would result in the loss of 1.8 million jobs over two years -- about half the industry's total direct and indirect employment in the U.S.

"The findings indicate a bridge-loan scenario would be the more financially sound choice," said Patrick Anderson, chief executive of Anderson Economic Group.

The conclusions regarding a bridge loan are based on several assumptions, including that the government would realize $10 billion from an equity stake in the carmakers and that half of the loan would be repaid once the companies stabilized.

The taxpayer losses under the bankruptcy scenario result primarily from lost income and Social Security taxes because of widespread layoffs at the automakers and their suppliers, as well as higher outlays for unemployment benefits.

Some experts, however, argue that a Chapter 11 filing may be the best way for General Motors Corp., in particular, to restructure its crushing $60-billion debt burden.

Lynn LoPucki, a UCLA law professor who specializes in bankruptcy law, said there were simply too many parties with a stake in GM's future -- union members, retirees, dealers, bondholders, suppliers -- for an agreement to be devised outside Bankruptcy Court.

Lawmakers suggest "getting all of the creditors together in a room and agreeing on a plan to reduce GM's debt," LoPucki said. "It's impossible to get everybody in a room -- there are hundreds of thousands of creditors involved here."

In Chapter 11 proceedings, a committee would represent the interests of GM's creditors, making it easier to reach agreement on debt restructuring and renegotiating or terminating contracts, LoPucki said. Although bankruptcy law provides special protections for labor contracts, he said bankruptcy judges are typically sympathetic to employer efforts to reduce payroll expenses -- a crucial goal for GM.