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Can government be trusted to steer a GM bankruptcy?

The Obama team is helping to push the automaker's debt holders, unions, and executives toward tough choices, but the risks of intervention are many.

By Ted S. Warren/APStaff writer / May 29, 2009

A truck sits on display for sale at a Chevrolet dealer in Tacoma, Wash., Friday, May 29, 2009. General Motors Corp. is facing an expected bankruptcy filing on Monday.

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The economic news of the week isn't just that giant automaker General Motors is about to enter bankruptcy. It's also that the US government is the one who will be guiding the firm through the process.

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In a country that prides itself on free-market capitalism, this will be an unusual politically orchestrated bankruptcy.

The government intervention could have good results. It may prevent a prominent industry from collapsing at a time when the nation is already reeling from recession. It appears to be helping to expedite the needed restructuring of GM and another struggling Detroit carmaker, Chrysler. An Obama task force has helped push various stakeholders toward tough choices – a pattern highlighted Friday as the autoworkers union announced that its GM labor force had voted 3 to 1 for a pay-cut plan.

At the same time, President Obama and his automotive task force are entering politically difficult terrain by trying to save the industry.

For one, the rescue will be costly to taxpayers – an estimated $50 billion and counting. For another, critics say the federal government, in its effort to resolve the companies' problems swiftly, is upending tried-and-true legal traditions that have underpinned the economy since America's founding. And at the end of the day, thousands of industry jobs will still be lost.

"They’ve opened themselves up to a lose-lose situation," says Don Grimes, an economist at a University of Michigan in Ann Arbor. Voters could end up being angry that their money is being used to prop up private corporations that failed, and also angry about job losses at dealerships or factories where they live.

Meddling vs. hands off

Still, Mr. Obama’s decision to buttress the industry – and to draw limits around that support – is appropriate, he says. For all the political risks and the dangers of government meddling in private industry, the damage to the US economy without government support could be large.

"I have to give him some credit, maybe a lot of credit," Mr. Grimes says. "He did realize that the economy in its fragile state really couldn’t go with [an automaker] liquidation phase right now."

Detroit's troubles stem from both decades-old competitive challenges and the very recent sharp downturn in the US economy.

With auto sales plunging in recent months, private investors were unwilling to pump in the money that would be needed – even to finance a radical downsizing of the firms. So President Bush stepped in late last year with bridge loans to the two carmakers, and Obama has grappled with how to put together a government-financed restructuring.

Obama's 'pragmatic business people'

The goal is now for a quick bankruptcy for GM, probably starting on Monday and ending in two or three months. Chrysler is now partway through its own Treasury-financed bankruptcy process.

So far, the political "meddling" appears designed to achieve the same aims that any private-sector investor would have in the same role: restoring the firms to competitive viability.

"They all seem to be very pragmatic business people," says auto analyst Aaron Bragman, referring to members of Obama's auto-restructuring task force.