By Donald B. Bibeault and Charles R. Sena • March 30, 2009

If ever an industry cried out for the kind of medicine a well financed Chapter-11 filing can administer, it's the American auto industry.

We should ask ourselves: "What's best for the nation?" For taxpayers, consumers and auto workers seeking long-term employment in a competitive, futuristic industry offering products consumers want to buy. Sadly, what is happening today? "Choices" are framed based upon what is best for management, unions, and vulture investors who made a bad bet.

Government seeks to play a constructive role. But, so far, "bailout funds" have been handed to and wasted by managers who have failed to make the necessary, tough decisions for an ailing industry.

The Problem & The Illusion

Today's pattern of "denial" by management and the powerful United Auto Workers union is classic. They blame outside factors for their current peril. Management - aligned with labor, not shareholders - seeks to have taxpayers subsidize their profligate ways - or as promised, their less profligate ways. Their viability plans fall short of reality, and will only put off the day of reckoning.

Management's plans have several deficiencies. First, they fix the future with a rosy forecast, denying the severe reality of the current downturn, and including an up-turn too soon and robust. Not surprisingly, the ratio of white collar jobs to union jobs actually increases under management's plans rather than the other way around. The plans fail to address the labor cost problems head on. Their plans reach for viability on "a hope and a prayer."

Debunking the Myths

Of course, entrenched management, labor - and the politicians beholden to them - scream bankruptcy will produce unbearable collateral damage. Let's analyze their arguments.

Myth #1 - "Consumers won't buy cars from an auto manufacturer in Chapter 11." Not true. Management's "sales volume collapse" is bogus. Consumers are well informed and logical. When a few airlines filed for Chapter-11 in the 1990's, the other airlines claimed their C-11 status actually put them at a competitive advantage.

Would you rather buy from a teetering giant or from a company that has "bitten the bullet" and will be economically viable upon exit from Chapter 11? The government's role is best served as the source and facilitator of Debtor in Possession financing. Taxpayers would take a senior secured position and insure a financial bridge to a viable Plan of Reorganization. A well-financed C-11 - producing "certainty" of product and service availability -- is much better from a consumer confidence point of view than the uncertainty of twenty years of decline orchestrated by timid management and inflexible unions.

Myth #2 - "Bankruptcy is bad for suppliers." The opposite is the case. The Detroit three are chronically in a squeeze between price realities and excessive labor costs. Detroit copes with this reality by squeezing the life blood out of its suppliers to the point of insolvency. The Chapter 11 filing will have to be well planned including appropriate first day orders that immediately utilize cash collateral to pay cash on or before delivery and identify critical suppliers.

The Real Solution - An Action Plan

Yes, this crisis is unprecedented and will take courageous leadership from Washington. Here is a five-part program:

First: Send G.M. and Chrysler into bankruptcy. Stop handing taxpayer dollars to those who cannot succeed. Force a new reality on our auto industry . A well financed Chapter 11 is the best alternative. The three primary risks of C-11 for the auto industry are consumer acceptance, financing and supplier viability which have been addressed above.

Second: Approach Toyota, and others - provide them with substantial tax breaks for domestic US production if they will hire US workers laid off by G.M. and Chrysler. These companies have proven successful at building cars which Americans want - and they create good-paying, stable jobs right here in America.

Third: Provide investment tax credits to businesses to take over the shuttered American car plants and turn them into laboratories for the future - clean energy, transportation, infrastructure, and homeland security.

Fourth: Provide retraining funds and temporary public service jobs to the laid off employees during the three year to five year period in which it will take for Toyota and Nissan to step in and for new companies to spring up.

Fifth: Consider some form of government support for a portion of the pensions of older, retired auto workers victimized by the incompetence of management and the UAW.

Let's put our faith and the full force of the American government behind business leaders, investors and workers who know how to turn things around. Leaders who today are making great cars and employing American workers. These workers earn a reasonable wage, are often non-union, have stable jobs, and are homeowners, productive citizens and taxpayers.

The winners? American workers and investors, our long-term fiscal health, our national security.

The losers? CEOs who have repeatedly blundered and in whom Americans have lost confidence. Investors who made bad bets and should not be saved. The UAW, which most Americans see as greedy and out-of-touch.

Donald B. Bibeault, Ph.D. is a corporate turnaround executive and author of "Corporate Turnaround: How Managers Turn Losers Into Winners, in Novato, CA. Charles R. Sena is a political / nonprofit consultant and investment banker in San Clemente, CA.