Obama Transition Team Considering Bankruptcy "Prepack" for Automakers

President-Elect Barack Obama's transition team is considering a prepackaged bankruptcy for the automakers as a potential solution.  This may be the answer for the beleaguered automakers.  Although many have been calling for a bankruptcy solution for GM, F, and Chrysler, the implications of a potential bankruptcy have been weighing on the markets like a ton of steel.  A Chapter 11 filing during ordinary markets wouldn't necessarily be catastrophic; the airlines seem to do it every couple of years.  The biggest concern about a bankruptcy filing by the automakers right smack in the middle of the credit crisis has been the lack of availability of debtor-in-possession financing.  DIP financing is crucial during a Chapter 11 in that it allows companies to continue to fund operations while working through complicated negotiations with creditors.  GE Capital, the largest provider of DIP financing, recently announced it was exiting the business.  Without access to this type of financing, the probability of a Chapter 11 bankruptcy leading to a liquidation has increased dramatically for any company seeking protection from creditors.  The thought of all three automakers needing a huge amount of this type of financing during a period of such constrained credit is just too much for the markets to bear. 

A prepackaged bankruptcy with the government providing the interim financing is perhaps the ideal solution.  The automakers could restructure all of their burdensome obligations, allowing them to better compete with the foreign automakers.  If a deal was reached with creditors prior to a bankruptcy filing, with the government's financial support, consumers would not shy away from purchasing vehicles from the companies because a clear exit strategy would be in place.