Bankruptcy doesn't carry the stigma it used to. Companies file for Chapter 11 all the time and emerge fairly sound. Still, if you had to choose between buying a car from a bankrupt company and a nonbankrupt company, which would you pick?
That's the question looming over the bankruptcy proceedings of Chrysler and GM. And the Obama administration's public statements over the next several months may help determine the answer.
So far, President Obama has gone out of his way to reassure the public of the car companies' solvency. "This is not a sign of weakness," Obama said when Chrysler filed for bankruptcy in April. Announcing GM's Chapter 11 filing on Monday, he said: "I want to remind everyone that if you are considering buying a GM car during this period of restructuring, your warrantees will be safe and government-backed."
It may seem odd to have the leader of the free world—especially during a time when the economy faces systemic problems—guaranteeing your car warranty. (Is that the full powertrain warranty? And how much does he think I should pay for that muffler?) But Obama may have no choice. At this point in his presidency, to steal a phrase, what's good for GM is good for Obama.
Part of the issue is speed: Once a company recovers, the stigma of bankruptcy fades quickly. Think Kmart, or the airlines that seem to go bankrupt every five minutes. If GM follows a similar trajectory, the skittishness shouldn't last long. "I think six months from now, no one will remember it ever filed," says Jonathan Hayes, a bankruptcy professor at the University of West Los Angeles School of Law.
On the other hand, few bankruptcies are as high-profile as GM's. When most companies file for bankruptcy, the news lands on the inside pages of the business section. The woes of GM and Chrysler are regular front-page news. At the same time, cars are different from groceries and plane tickets in that they're long-term investments—buyers expect to be able to get their cars serviced for years to come. As a result, bankruptcy could hurt consumer confidence in Chrysler and GM more than usual. Guaranteeing warranties helps, but it might not cure the nagging gut feeling that you're taking a risk buying that Buick.