Reuters: Despite Bailout, GM Bankruptcy Possible; Uncle Sam Isn't First-in-Line Creditor

A week ago (at NewsBusters; at BizzyBlog), I noted that government bailout recipients General Motors and Chrysler had horrible sales in January, and that their declines are accelerating. GM was down 49% year over year in January, compared to -32% in December; Chrysler was down 55% in January, compared to -53% in December.

Meanwhile, the companies' main foreign competitors turned in January sales declines of roughly 30% that were just as bad, but at least not worse, than December. As a result, those companies took another 4% or so of market share from their US-based rivals.

Of course, no media outlets attempted to make any connection between the GM-Chrysler declines and the idea that consumers might either resent their bailed-out status, or might be worried about their survival and the potential impact of their bankruptcy or even disappearance on warranty and repair costs. Nor did any media reports that I'm aware of consider the idea that declining sales at those companies might jeopardize their ability to repay Uncle Sam's bailout "loans."

Now, despite the cash infusion from Uncle Sam, Reuters reports an analyst's belief that a bankruptcy filing by GM remains a possibility. More importantly, the wire service also claims that the government is actively involved in exploring that option. Finally (put down your drinks first), we learn that taxpayers aren't even first in line to get repaid:

A bankruptcy filing by General Motors Corp could allow the struggling automaker to reduce its debt more aggressively than an out-of-court restructuring and might not be as damaging as it would have been just a few months ago, an analyst said on Monday.

"We think the damage to the enterprise of a GM bankruptcy today is notably less than it would have been a few months ago, largely because of public desensitization to a bankrupt carmaker," JP Morgan analyst Himanshu Patel said in a note for clients.

Patel's note raises the possibility by a prominent Wall Street analyst of the renewed threat of a bankruptcy by GM or Chrysler, a risk many observers believe had been sharply reduced by the government bailout.

..... Patel said that if GM fails to win substantial concessions from bondholders and the UAW, the bailout could become "a political lightning rod" for the Obama administration.

"We are increasingly thinking that such a development might force the White House to more seriously consider allowing GM/Chrysler to go into bankruptcy," he said.

..... The U.S. Treasury has retained two law firms with extensive bankruptcy experience and the investment bank Rothschild to advise officials on the taxpayer-backed restructuring of GM and Chrysler. One of the scenarios those advisers will consider will be a government-assisted bankruptcy filing, a person with direct knowledge of the work has said.

Another of the other immediate priorities will be working out an agreement between other creditors and the government that would provide senior status to the public funding, a second person involved in the discussions said.

For all the ink spilled and bandwidth burned in the press's coverage of the GM-Chrysler bailout in December, how did the fact that Uncle Sam doesn't have first priority as a creditor apparently escape unnoticed? Did our congressmen and senators even know this?

In any event, it will be interesting to see how the press handles what appears to be the continuing descent into the financial abyss of the two auto bailout recipients. Their "viability plans" are due in one short week.

Cross-posted at BizzyBlog.com.