Car Czar, Treasury Could Force Automaker Bankruptcy

This post first appeared on Minyanville.

As 2008, a year most market participants would just as soon forget, draws to a close, the endgame approaches in the fight to save Detroit.

After Senate Republicans blocked a $14 billion rescue package for General Motors (GM) and Chrysler last week, the ball landed squarely in the court of the Bush Administration. Both GM and Chrysler have warned they'll be insolvent by the end of the year without government assistance.

Bloomberg reports the Treasury Department is considering a plan giving the yet-to-be-named “car czar” or the Treasury Secretary power to force GM or Chrysler into bankruptcy if either firm can't survive on its own. Officials said the troubled automakers would be required to submit turnaround plans by March 31st, but would not release further details of the plan.

Moody's Investor Services wrote in a note that a rescue would most likely include a so-called "prepackaged bankruptcy," which would remove certain roadblocks to restructuring the companies.

In a letter urging President Bush to withhold assistance, South Carolina Governor Mark Sanford asserted that using TARP money to rescue the auto industry would open the floodgates to other troubled industries. Sanford, a Republican, said “We are at a tipping point in moving from a market-based economy to a politically-based economy.”

Meanwhile, Ford (F) supports plans to rescue its beleaguered competitors, saying any failure of a major auto maker would have ripple effects throughout the industry.

The White House promised to keep tabs on any taxpayer money it decided to dole out, saying “There will be rigorous oversight to make sure that these companies are doing what they promised to do, and we want to make sure that everyone is making the concessions that they’re going to have to commit to make.”

The Treasury Department, however, doesn’t have a stellar track record on transparency and accountability. Earlier this month, the Government Accountability Office found critical oversight, transparency and regulation problems and recommended the Treasury hire additional personnel to manage TARP. All the Treasury appears to excel at is spending money.

As dire as the situation has become, it's hard to find many that truly believe Washington will allow the automakers to fail. Whether the money comes from TARP, the Federal Reserve or some yet-to-be-announced slush fund, conventional wisdom would be in for a very rude awakening if Detroit is hung out to dry.