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Argument: Chrysler and GM should declare bankruptcy and merge

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Jack and Suzy Welch. "GM: The Case Against a Bailout". Business Week. 18 Nov. 2008 - Should the government bail out the U.S. auto industry to keep the players from going into bankruptcy?—Bill VanderMolen, Pittsfield Township, Mich.

How about this instead: The boards of Chrysler and General Motors (GM) put their companies into bankruptcy with the clear intent of reorganization and merger. As radical as that sounds, it's the best road we can see to a viable future for the industry.

And yes, the U.S. car industry does belong in the future. Free-market proponents have a point about the industry's "natural demise." Despite huge progress in American quality and design, well-run German, Japanese, and Korean companies have taken about half the U.S. market, and the competition—which will include China and India—is only getting tougher. But like many others, we believe that for the sake of jobs, national defense, and self-respect, America needs to keep its "true" domestic auto industry alive.

A government handout, however, isn't the way to make that happen. Washington would impose conditions and promise strict oversight, but it simply can't push through the kind of transformative change the industry needs. There would be too much political opposition, and regardless, the bailout sums being bandied about—$25 billion of taxpayer dollars, for starters—would only keep the Big Three heaving along, basically as they are. It's a life-support solution, not a cure. Time for a Bold Move

That's why the boards of the automakers should take the courageous step of putting their companies into bankruptcy. Some creditors might make the case for liquidation, but given the diminished worth of the automakers' assets, that's an unattractive scenario. Instead, creditors would most likely opt for the government stepping in as the debtor-in-possession financier supporting the reorganization.

Talk about a fresh start. For more than a decade, U.S. carmakers have chipped away incrementally at massive legacy costs. But reorganization would open the doors to meaningful structural change through the renegotiation of contracts with creditors, dealers, and unions. And it would offer better odds of paying back taxpayers.

Once in Chapter 11, a merger would further galvanize real change. Three companies are too cumbersome to unite, and Ford (F) has a two-tiered, family-owned structure, so we'll leave them out of this for now and propose GM and Chrysler join forces. Such a merger could create $15 billion in synergies from reduced capacity and overhead, money that could lower production costs and boost R&D spending. Granted, GM and Chrysler could lose share during the transition, but a merged entity would still end up with more than a quarter of the U.S. market.

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