The auto industry rescue package that was rejected by the Senate need not be the last option for federal intervention. Instead, President Bush should immediately announce that the government will ensure funding for a debtor in possession (DIP) loan for GM and Chrysler that will allow the companies to file for bankruptcy in an orderly manner.

Funding for this loan should come from the financial institutions that have received Troubled Asset Relief Program (TARP) funds.  In the same way that the heads of the major commercial and investment banks were ordered to accept TARP funds, these institutions must accept a mandate to provide debtor in possession funding.  If they cannot come up with enough money, the government should provide the balance. To encourage participation, President-elect Obama should voice his support for this plan and his commitment to ensuring the long-term viability of the US auto industry.

If GM and Chrysler are forced to file for bankruptcy without support from the government, and the market does not provide DIP financing, it would cause what UAW President Ron Gettelfinger has termed a “run on the bank” where suppliers would refuse to provide credit to auto companies resulting in a complete shutdown of the industry.

On the other hand, if the loans rejected by Congress were to be reconsidered and approved, they would merely forestall an inevitable bankruptcy and provide little incentive for the auto companies to enact the major restructuring that can make it profitable in the current, low-demand environment.  GM is saddled with over $60 billion in debt, which it cannot service, and its current labor contract with the UAW puts it at an unworkable competitive disadvantage to its non-US rivals.  These burdens cannot be lifted without going through bankruptcy.  NYU law professor and former airline executive Michael E. Levine said the failed $14 billion rescue package would have created the Mother of all Moral Hazards.  The UAW and the industry’s creditors will hold out for “full pay to the last day” (in the words of Eastern’s and TWA’s unions at the time of their bankruptcy).  No Car Czar will be powerful enough to achieve the reform the industry needs. 

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