I confess, I'm impressed that the Obama administration seems willing to seriously contemplate putting the American auto industry into bankruptcy. The auto industry is the symbol of the 1950's-style highly unionized technocratic economy that has soared back into prominence as the public dream of the Democratic party (oh where, oh where have the environmentalists gone?) Bankruptcy will rip the last bastion of Galbraith's New Industrial State thoroughly asunder, shattering union contracts, closing plants, sending Detroit's legacy marks to the scrapyard.
It's clear at this point that there's little alternative to either bankruptcy, or a government-steered process that looks very like it. Detroit's sales are now falling below the "worst case scenario" the Big Three presented to Congress last fall. I suspect that Detroit knew it then, and hoped that they could rope the government into throwing good money after bad.
But I still wonder how serious the administration is about actually putting the Big Three into formal bankruptcy. It seems more likely to me that they're playing chicken with the creditors, trying to entice them into taking a known haircut right now rather than risk the wrath of a bankruptcy judge. For one thing, debtor-in-possession financing does not seem to be eagerly forthcoming:
It's not clear to me why creditors, in exchange for the priceless gift of being bullied into lending money to an industry that is radically contracting, would agree to let Uncle Sam cut in the seniority queue. Making them use their TARP funds for the purpose is little more than an accounting shell game--making frail banks lend on a bad bet just makes it more likely you'll have to pump more capital into the system. This makes me think that they are not serious about getting DIP financing; they're just trying to force other creditors to the table for the restructuring talks that have so far gone nowhere, since creditors reasonably believe that they will get a worse deal from DC than they would from a judge.