A prepackaged bankruptcy for auto makers?

Bloomberg:

President-Elect Barack Obama`s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry's financial crisis, according to a person familiar with the matter.

Obama's team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University's law school who heads Obama's economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.

U.S. lawmakers yesterday postponed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout as an alternative solution. Automakers such as GM could use court protection to reduce debt and reject unfavorable contracts.

``It creates the environment to deal with GM's problems but limits government financial commitment,'' said bankruptcy lawyer Mark Bane of Ropes & Gray in New York.

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This would probably deal with the interim financing problem that the automakers would have in regular Chapter 11 bankruptcy. I suspect that the government would guarantee the line of credit to keep the companies operating while they did their reorganization. The big question would be whether there would be restrictions on the reorganization that would keep in place contracts that no longer make economic sense. If that were the case the bankruptcy would not rid the companies of their worst problems--bloated pensions and benefits and uneconomic labor contracts.