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Why The Detroit Bailout Should Include Bankruptcy

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by Felix Salmon
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Nov 10 2008 12:42pm EDT

Why the Detroit Bailout Should Include Bankruptcy

With Deutsche Bank saying that GM is worthless, and some kind of government bailout of Detroit now a certainty, the battle lines are being drawn: is bankruptcy an option? Justin Hyde says it isn't, and he might well be right, politically. But it certainly should be an option, and Joseph White has an excellent column today explaining why.

If there is to be a government bailout of Detroit, a large sum should go towards funding the union retiree health obligations set up by the three big automakers in 2007. There should also be a scheme to backstop the automakers' warranties, so that consumers don't balk at buying a new GM car for fear the automaker won't be around any more to make good on its obligations. But I see no reason why GM in particular, and US automakers in general, shouldn't take advantage of the perfectly-good bankruptcy system if they're insolvent. Yes, the government might be the entity extending the debtor-in-possession financing. But GM bondholders should absolutely share in the pain here.

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