It’s no secret that American auto makers are in trouble. Car sales last month were the worst they’ve been since 1983. GM’s sales alone were down 45%. With sales down while expenses remain pretty steady, the “Big 3″ car companies–GM, Ford, and Chrysler have come to Capital Hill to beg for $25 billion worth of loans, a proposal that is currently gridlocked in Congress.

Image Credit: Mike Johnson

While Congress is dithering, there are a number of proposals for what to do about automakers coming from pundits and politicians everywhere. Here’s a few of those proposals, along with their likely effects and chance of success.

Doing Nothing

What’s the Plan?

One of the more popular plans moving around the internet is that the government simply do nothing at all to help the Big Three, and let the market take care of itself. If they go bankrupt, they go bankrupt. If they get bought out, they get bought out.

What’s the Impact?

In the short term, this could be pretty devastating. If sales don’t pick up, at least one of the Big Three companies (my money would be on GM) is likely to fail. Which means bankruptcy or a buyout. Now, under normal economic conditions, either the company would go under Chapter 11 (which would mean a restructuring of the company, similar to what some airlines have done recently), or it might find its assets bought out by somebody else. The problem, though, is that with the credit crunch, a car company might not get the loans it needs to keep paying the bills through a Chapter 11, and it’s also likely that no company could raise the capital to buy it out. That means a likely Chapter 7, which is a liquidation of the company. It almost certainly means that a whole bunch of jobs will be lost–most likely for good. In the long term, this will keep the industry lean and efficient. In the short term, things will be pretty bad.

What’re the odds of this happening?

Pretty much nonexistent. Michigan is a swing state, and the Big Three have plants all over the country. Politicians want to keep their jobs, too.

A Loan With Only A Few Strings Attached

What’s the proposal?

The auto companies have approached Congress with a proposal to be loaned $25 billion dollar to keep themselves afloat during the recession.

What’s the impact?

The Big Three will limp, revenues will continue to decline, and they’ll probably ask for more money in a year or two. Jobs will almost certainly be lost.

What’re the odds of this happening?

Sadly enough, not too bad. The current legislation going through is pretty much this–little oversight, no demands for the businesses to change their plans. Executives probably won’t get bonuses, though. And I’m sure that there’ll be some new bureaucracy put in place to “keep an eye” on the auto industry. It won’t actually do anything, but it will look nice. And still be in place when we all have jetpacks instead of cars.

A Glorified Chapter 11

What’s the proposal?

One idea that’s been gaining some steam is to ensure that if one of the Big Three goes to Chapter 11, Congress will guarantee their loans. This gets around the earlier mentioned problem of the credit crunch impeding a Chapter 11. A slightly modified alternative to this is to basically have a Congressionally mandated restructuring similar to a Chapter 11, but modified slightly to fit the needs of the industry.

What’s the impact?

The impact to this is basically a cushioned version of doing nothing. The companies that go through Chapter 11 will still be employers, will still be making cars, and will be paying off creditors. In time, the recession will end and the companies might emerge from bankruptcy in decent shape. Or they might fail.

What’re the odds of this happening?

Not bad at all. I’d say that the legislative route is more likely than the traditional court route, meaning that there will be all kinds of bloat, bureaucracy, and silliness will pass. But this is probably the most likely scenario.

Money for Green Cars

What’s the proposal?

Some folks around the left side of the house are seeing the Big Three’s woes as a golden opportunity to have the Federal government strike a deal with the Big Three to raise fuel efficiency and develop cars running on alternative fuel sources.

What’s the impract?

The primary impact will be a great big hug for the President from the Japanese ambassador as a consequence of ensuring that Japan’s dominance in eco-friendly cars continues. Executives from the Big Three will laugh to themselves on the way to the bank, and every two years or so they will approach the government for more money with the assurance that a car that runs on wishes and candy canes is “just around the corner.”

Suffice to say, I’m a bit skeptical that this sort of inducement will work. More likely, the Big Three will make just enough progress that support for giving them more money in Congress will never die, removing any economic incentive for leaner, more efficient production.

What’re the odds of this happening?

Thankfully, the odds of a deal like this are fairly low. There’s not a lot of support for this idea on the Hill, which is pretty much divided between folks representing the above three camps.