ANN ARBOR, Mar. 24, 2009 (Kyodo News International) -- General Motors Corp. (NYSE:GM) and Chrysler LLC requesting federal bridge loans has raised the question of whether bankruptcy should be considered a more cost-effective option.
With taxpayer money on the line, total expenses to the U.S. public as well as the stigma attached to bankrupt businesses have both legal and automotive experts considering such a dire course of action during this crucial point in today's global recession.
David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, remains convinced that bankruptcy should not be considered a solution for the struggling U.S. automotive industry.
But Mark J. Roe, a Harvard Law School professor specializing in corporate law, sees filing for Chapter 11 holding some potential advantages for GM.
In a recent interview with Kyodo News, Cole suggested that the negative image attached to bankrupt companies would make it impossible for automakers to sell cars.
Bankruptcy would be publicly considered a ''failure,'' he said, arguing consumers would not opt to buy from a bankrupt company when other options are available.
''Bankruptcy is probably not a good option in an industry where you have a number of competitors, and consumers can easily find a substitute for that product,'' said Cole.
Roe's view of a bankruptcy option presented less of an image of failure but more of a new possibility for the two troubled companies.
''Better to go into Chapter 11, resolve the financial problems and then come out of Chapter 11 and be able to advertise the new GM,'' he told Kyodo News in Cambridge, Massachusetts.
With this strategy, consumers would ultimately not shy away from the carmakers but would reinvest in them as ones that publicly address their problems.
As the media has tracked the bridge loans granted to the automakers so far -- $13.4 billion to GM and $4 billion to Chrysler -- the real question of bankruptcy is whether filing for it would cost more than receiving ongoing federal aid via bridge loans.
Roe argues that bankruptcy would help automakers resolve a significant number of their problems so that the core that comes out of bankruptcy can be ''operationally sound.''
Specifically, he proposed transferring GM's core operations into a separate company under Chapter 11 while keeping liabilities and other legacy obligations involved in bankruptcy.
He said operations could be prioritized, financed and later spun off.
