Bankruptcy or bailout? Either way, Detroit's Big Three automakers are in a tough spot.
The U.S. Senate failed Thursday night to reach an agreement on an emergency $14 billion in loans to the domestic auto industry, which could force one or more of the companies into Chapter 11 bankruptcy. General Motors says it would run out of cash by the end of the year and reportedly has hired lawyers to review the possibility of filing for bankruptcy.
The House approved the emergency loan package Wednesday night, but it stalled in the Senate, where Republicans opposed the legislation without significant changes.
But political debate aside, economists agree that an auto rescue package simply would buy time for the auto industry to restructure. What's not clear is whether it would be better to restructure through bankruptcy proceedings or under the watch of the bailout's proposed government "car czar," who would dole the money out but yank it back if progress isn't seen.
Economists say the biggest difference under the bailout option and the car czar is protection for the United Auto Workers union. Under bankruptcy, the union contract could be terminated.
Peter Morici, a professor of business at the University of Maryland, said a Chapter 11 bankruptcy would make restructuring easier and more affordable because the union contract can be abrogated, nullifying severance pay, and bankruptcy judges have more power.
"The czar is a referee," he said.
But Senate Democrats argue they have no choice but to approve the loans.
"I have three reasons for voting for this package," Sen. Barbara Boxer, D-Calif., said. "Jobs, jobs and jobs."
That's the same reason President Bush, whose aides helped shape the loan proposal, called reluctant GOP senators to push for approval. Administration officials argue that Chapter 11 bankruptcy would be best option under normal circumstances, but because of the financial crisis the failure of the Big Three automakers would drag down the entire economy.
But some Republican senators worry jobs will be lost anyway if the automakers don't face the music now and do what everyone knows is necessary -- a massive restructuring.
"In the end, its greatest single flaw is that it promises taxpayer money today for reforms that may or may not come tomorrow," Senate Minority Leader Mitch McConnell said.
David Yermack, a professor of finance at the New York University's Stern School of Business, said it appears to him that a "car czar is going to protect the unions more. ... That's the whole point of the bailout to cater to that constituency," he said.
But the overall plan is vague, he said, making it hard to tell what it might mean for creditors and other parties involved. Even so, he sees similarities between the bailout plan to bankruptcy.
"What the bailout looks like is a prepackaged bankruptcy," he said. He added that in the end, the relationship with the consumer is the key one, and if the cars companies don't make products that attract customers, "none of this matters."
The auto rescue package could be "delaying the inevitable," he said. "Throwing good money after bad."
Simon Johnson, an economics professor at the Massachusetts Institute of Technology, agrees that the car czar will offer more protection to the unions but disagrees that the plan is a prepackaged bankruptcy.
"What we have on the table is not a prepackaged bankruptcy, but in six months that's what we'll have," he said.
Echoing Democratic leaders and the Bush White House, Johnson said the auto rescue package is preferable to bankruptcy because the financial system is "incredibly weak" and economic conditions might improve by next year.
"We're just starting to get a turn around in economy," he said. "I think there are some glimmers of possible hope in the U.S. economy. Why throw another big shark in?"
But many senators say an emergency loan now only delays the inevitable. They contend it is already clear that a fundamental restructuring is the only way.
"Therein lies the problem," Coburn said.
FOX News' Jim Angle contributed to this report.