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Bankruptcy Supporters Make Another Stand on Capitol Hill

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Photo: James Manners

Forget about the dog and pony shows with the Big 3 CEOs driving to Washington

Forget about the law makers grand standing with comments about protecting American jobs.

Those are a distraction from the real question Congress will start addressing today: How do they help America's auto makers?

Some Senators are now saying that perhaps the best option is to craft a "bankruptcy style" package with the federal government acting as the financial backstop, providing the debtor in possession (DIP) financing. The idea being that a bankruptcy "federal style" is the only way to dramatically re-shape the Big 3.

On paper, it makes sense. In theory, this would allow Detroits auto makers to kick out their dealer contracts and get rid of thousands of dealership contracts. In theory it would also let the auto makers get out of billions of dollars in legacy costs that are choking the bottom line. And in theory Uncle Sam acting as the piggy bank means the money needed to restructure the Big 3 will be there. And heck, this is essentially what the government did with Chrysler back in 1979.

Before you buy into those arguments, keep a few things in mind.

Bankruptcy is never short or easy and in this case it be especially messy. Douglas Baird, who specialise in bankruptcy at the University of Chicago tells me a GM bankruptcy would be the messiest ever. Also, it's quaint to look back now and say, "Chrysler was helped in a government deal that was structured like bankruptcy, let's do it again.". People forget that it took months for Washington to work out the Chrysler deal.

This time, Detroit doesn't have months. It barely has a few weeks. Suppliers are now demanding cash on delivery payments, and the money is running dangerously low in motown.

So as law makers grill the Big 3 CEOs today, focus on whether this bankruptcy option might work. Forget about the CEOs driving themselves.

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