Why I don't buy the bankruptcy argument

Those arguing for the auto industry bailout dismiss the bankruptcy option with an argument along the following lines:

1. Auto makers' declaring bankruptcy will make consumers fear auto makers will go out of business.
2. If consumers fear they'll go out of business, consumers will fear that in buying a car from a bankrupt firm, they'll end up with a need for that car and no company to service that need.
3. Therefore, consumers won't buy from bankrupt auto makers.

They argue that the precedent of airlines declaring bankruptcy and keeping customers doesn't hold because air travel is short term, and cars are long term, and have different prices, etc.

I'm willing to grant parts 2 and 3 of the argument above, and even the airline point (though I disagree). I take issue with point 1. When you have to go to congress on your knees begging for billions to survive just the next few months, there's already ample reason to fear you'll go out of business. I argue bankruptcy doesn't change that perception at all. In fact, it may reverse that perception, as it gives the company a chance to genuinely transform instead of narrowly escape.

So the consumer confidence damage has largely been done. Granted, a blanket guarantee from Uncle Sam that they'll never be allowed to go under would surely boost confidence, and while that may be what the auto industry seeks implicitly, that's the fast track to socialist inefficiency.

The only concern with bankruptcy would be the impact on trade credit with supplier firms. If GM gets to delay payment for parts under bankruptcy, then it may spark a wave of bankruptcies in the supplier firms, now strapped for cash, that freezes up capital flow further down the chain. It could bull whip. I don't know enough of bankruptcy law to know how that'd work out, exactly.

So maybe the big 3 ought to argue that they should be allowed to die from bad products and stupid labor contracts, but not from a capital markets-created cash flow problem. "Let us die as shitty car companies, not as shitty financial engineers. Give us enough money so that we may have a respectable death." That's an argument I might buy.