“There are many ways of dealing with that issue – government can guarantee those contracts etc…”

I agree. My forecasts are centering in on a union/pension/health care/warranty bailout for US automakers’ cars and employees, and nothing for Wall Street fatcats that own GM and GMAC bonds and stock. This way, Obama can reward his union voters in MI, avoid loss of confidence in the cars’ reliability and service longevity, but show that he is worried about moral hazard.

I mean, this is different from an airline bankruptcy, where you are sold a service — “move my body and possessions from Denver to Chicago.” A car maker needs the strength to honor 7/70K warranties.

After you were burned with the voiding of a warranty, would you go back and purchase a car from the reorganizing F or GM?

This current situation has a deja-vu from the early 80s. At that time it was Chrysler that was the focus of the death watch. Then-Chrysler-chairman Lee Iacocca convinced the Congress in 1980 to guarantee loans to the company to keep it afloat. Iacocca also restructured the operations, laying off many workers and closing plants. The designers came up with the popular K-cars and later, the minivan, which made the company profitable again and allowed the loans to be repaid.

The Chrysler loan-guarantee action will likely become the model for today. It will allow Congress to say they tried to help while leaving the responsibility for GM’s future with GM itself. It also gives Congress an escape hatch against future demands if this one doesn’t pan out. GM will have to be made to understand they have one last chance to fix their problems or its sayonara time. Will this idea work again? Much depends on the economy and much depends on GM itself. But I think it likely this is what will be tried.