The automobile industry thought it could follow the successful sales pitch that George W. Bush used to sell the Iraq War and Hank Paulson used to sell the $892 billion Troubled Assets Relief Program (TARP) who kept repeating that the alternative to not giving them what they want would be catastrophe. But America may finally be wising up to the hollowness of that ploy. And the great news is that the auto industry is finally starting to adapt to this reality.

Rather than claiming that there is no Plan B and that a bankruptcy would lead to a depression, it is now considering a pre-packaged bankruptcy. As I posted last month, the options for the industry are Chapter 11 (wiping out common shareholders while restructuring and continuing to operate) or Chapter 7 (liquidation of the assets).

There is no reason that U.S. taxpayers owe the auto industry their money -- and in a free market economy the bankruptcy process is designed to help industries fix their problems. If the auto industry is now willing to consider using this process to spur a restructuring that will lead to a smaller, but viable industry, I believe this is how our economy should work.

As General Motors (NYSE: GM) works overtime to create the illusion of progress that might lure in skeptical lawmakers, it's making its debt holders an offer that will probably be easy to refuse: Swap your debt in for equity.

If I'm a GM creditor I'm saying, "No deal, Howie!" By swapping their debt for equity, bondholders will position themselves to be completely wiped out in a bankruptcy filing. Even if the company avoids bankruptcy, that equity will represent a claim on the future cash flows of a company that is burning through billions of dollars each month.

The Wall Street Journal reports (subscription required) that "GM's debt load, estimated by J.P. Morgan to total $43.3 billion at an annual interest expense of about $2.9 billion, has been a primary culprit in the company's deterioration in recent years. Many analysts have suggested GM needs to file for Chapter 11 bankruptcy-court protection in order to force creditors to renegotiate."

That still seems like the most likely outcome for the company, and as long as bankruptcy remains a likely outcome, creditors are unlikely to swap senior debt for equity that will have last dibs in a Chapter 11 scenario.

And that's the ultimate catch-22 for GM: Congress is unlikely to provide the financing that would stave off a bankruptcy unless the company is able to restructure its debt to reduce its interest obligations. But that restructuring is unlikely to happen until GM can convince creditors that bankruptcy isn't a possibility.

Count on management not to tell the truth when things are really bad. General Motors (NYSE: GM) CEO Rich Wagoner keeps saying bankruptcy is not an option for the car maker. It would ruin too many suppliers and kill consumer confidence, pushing more and more customers into the hands of the competition.

Of course, what Wagoner says does not matter. Once GM's creditors get to the point when they have not been paid for several months, they can go into court and press the issue. Bingo. GM has to seek protection.

According to The Wall Street Journal (subscription required), "Members of General Motors Corp.'s board of directors are willing to consider 'all options' for the ailing auto maker, including an eventual filing for bankruptcy protection."

What would a GM bankruptcy look like? For starters, common shareholders and many preferred holders and bond holders would lose most or all of their money. Suppliers would have their receivables from the big car company cut, perhaps by huge sums. But, at least they would not have to lose their largest customer.

Bloomberg reports that President Elect Barack Obama's transition team is taking a hard look at the possibility of a prepackaged bankruptcy for the Detroit's troubled automakers.

In a prepackaged filing, companies like General Motors (NYSE: GM) would head to the bankruptcy court with agreements already worked out with the major constituencies: workers, suppliers and lenders. Going in with a plan could cut down on some of the fear and uncertainty surrounding the filing and cut down on the time it would take for the company to work its way through the courts.

It's good to see that Obama is taking a sane, realistic approach to an auto industry bailout. There has been concern that the new administration would be too generous in the terms -- and stones will fly if a GM workout is done with anything other than a bankruptcy filing. Bloomberg adds that "the president-elect earlier urged Congress to approve as much as $50 billion to save automakers, using the model of Chrysler's bailout in 1979."

Right: because that one worked so well that they're coming back 30 years later -- billions in excess compensation later. It's true that the Chrysler loan was paid back quickly, but it allowed the company to buy time and not really confront any of the long-term problems that have proven to be its undoing.

Hopefully Obama will listen to his more conservative advisors and push for the bankruptcy option. It's the only one that makes sense.

After a meteoric rise followed by a swift decent into bankruptcy, Steve & Barry's caught a lifeline when Bay Harbour Management LLC agreed to purchase the company's assets back in August. Bay Harbour hoped to keep 150 of the company's 276 store open. But the sagging economy appears to have dashed those plans.

The Wall Street Journal reports (subscription required) the company "is set to announce this week it will go out of business, according to two people familiar with the situation." All 5,000 employees will be let go after the liquidation, and the company's brand will probably be sold for next to nothing and live on in a much reduced capacity. For example, I could see Wal-Mart (NYSE: WMT) acquiring the brand to bolster its value-oriented fashion proposition.

General Motors (NYSE: GM) can't compete in the global automobile industry. In the 1960s it had 50% market share, now it has 20%. Yet the management culture at GM hasn't much changed in the last 50 years. This despite the emergence of powerful global competitors, like Toyota Motor Corp. (NYSE: TM), which is poised to take over the global market share lead this year. That's why it would be a bad bet to put taxpayer money into GM.

It seems popular to blame the UAW for GM's problems. But as I posted in January 2006, GM can't compete for a variety of reasons. GM used cars as a loss leader for selling the more profitable leases. For the first nine months of 2005, GM limited its $6 billion in vehicle operating losses due to the $2.2 billion it made financing those vehicles. It was trying to cut capacity by 19% -- since 20% of its factory capacity was idle -- as its stock lost 44% and ratings agencies cut its debt to junk status.

By contrast, Toyota beat GM on every measure that mattered. Its stock was up 30% for the year; its products led on initial quality surveys, and consumers paid 14% more for Toyotas than for GM cars. Toyota also built its cars 7% faster and enjoyed a per car cost advantage of between $300 and $500 over GM. Toyota's cars were so popular that its factories were operating at 100% of capacity -- yielding a $1,488 per vehicle profit compared to GM's $2,300 per vehicle loss.

Yesterday, Peter Cohan asked the question, will General Motors (NYSE: GM) file for bankruptcy? He speculated that it could happen this week.

I'm not smart enough to speculate about a timeline, but I've been saying for as long as I can remember that, ultimately, General Motors will end up in bankruptcy. I've been trashed for that opinion, and while the company has steadfastly denied that bankruptcy is even a possibility, intelligent observers see it very differently.

The New York Times recently explored the issue of whether bankruptcy is the best option for the company, and hedge fund king William Ackman said that it is. He told Charlie Rose that a bailout is not the solution as long as the company is still operating outside of the bankruptcy court as that would mainly help GM's creditors who would be the ones really getting the taxpayers' money. "That's not a solution to the problem."

Bankruptcy is the best option for GM. The company's equity is worthless anyway, and a bankruptcy filing will give the company the opportunity to get rid of its debt. If the federal government wants to help GM's employees avoid a disastrous fate, they can do that with more leverage within the bankruptcy process.

The carnage at Circuit City Stores Inc. (NYSE: CC) continues as the company flails desperately -- and probably futilely -- to avoid a bankruptcy filing. The company announced that is laying off hundreds of workers at its Richmond, VA, headquarters, on top of previously announced store closings, liquidations, and 6,800 store-level layoffs. This is all in the past week.

Spokesman Bill Cimino told The Wall Street Journal (subscription required) that "Out of respect for our associates, we're not commenting" on the details of the layoffs.

The company's stock closed at 25 cents on Friday, down from a 52-week high of $8.24. Back in 2006, the company's stock traded as high as $30 per share. In 2000, the shares briefly traded at more than $50 per share.

The company's cash problems and inability to get suppliers to extend credit will prevent the company from being competitive during the holiday selling season that is its last chance to save itself.

Since filing for bankruptcy in July, Mervyn's has been closing stores and fighting for survival in a much-smaller form. But now the company has announced that it will close its 149 remaining stores, with going out of business sales set to begin shortly.

In a press release, CEO John Goodman announced that "We are disappointed with this outcome but the Company's declining liquidity position and the extremely challenging retail environment, together with the fact that we have exhausted all other possibilities, requires that we take this action."

The company was taken private by a group including Cerberus and Sun Capital back in 2004, and that deal is now the subject of considerable controversy. Last month, the bankrupt company sued its former owners, alleging that the deal was structured to separate the operations from the real estate, and that the private equity owners then proceeded to sell real estate, pay themselves dividends, jack up lease payments, and essentially transfer value from the chain to the private equity buyers.

It remains to be seen what will come of that lawsuit but, if it goes to trial, it will be an interesting case that looks at the role of private equity in the financial world.

A Miami bankruptcy judge ruled that the U.S. Trustee Program, an arm of the Justice Department that oversees bankruptcy court related issues, cannot seek sanctions against Countrywide Financial in bankruptcy court. The U.S. Trustee had filed three lawsuits on behalf of debtors (WSJ subscription required) who had allegedly been "abused" by Countrywide during the bankruptcy process.

The judge, A. Jay Cristol, ruled that only federal prosecutors can bring such lawsuits, while still commending the agency for "noble intentions and efforts to protect the public from reprehensible conduct by an apparently overreaching mortgage lender."

The next step will hopefully be for federal prosecutors to take on the company. Countrywide, which is now owned by Bank of America (NYSE: BAC), is still facing a plethora of litigation from its former shareholders and customers. Given the continued meltdown in the mortgage industry since the deal closed, it seems likely that Bank of America overpaid badly for the lender. The millions that Bank of America will have to put up for legal expenses, settlements, and possible judgements also won't help, and that's to say nothing of the distraction it creates for the company's executives.

Evergreen Solar, Inc. (NASDAQ: ESLR) plunged to an all-time low of $3.30 on Tuesday, thanks to the widespread ripple effect caused by Lehman Brothers' bankruptcy filing. As Evergreen confessed to a potentially substantial Lehman-related loss, analysts rushed yesterday to hand out price-target cuts. Today, Citigroup bucked the trend by upgrading ESLR from "sell" to "hold."

The bullish note seems primarily based on increased transparency regarding the Lehman situation, as well as a sharp decline in the stock's valuation. In a note to clients, Citigroup clarified, "With ESLR more clearly defining its exposure to a Lehman Bros. bankruptcy, the worst-case scenario is now well-defined . . . these issues appear much better discounted at current levels."

In response to the upgrade, ESLR has added more than 13% today. The shares are trading around the $5 mark, though, which puts them in territory not previously explored since May 2005. The stock's year-to-date loss now totals 75% -- a stomach-churning plunge, for sure, but the stubbornly bullish sentiment among investors suggests that more downside may be in store for Evergreen Solar.

Reuters reports that derivatives traders have opened an emergency trading session this afternoon to settle a variety of derivatives trades involving Lehman Brothers Holdings Inc. (NYSE: LEH). As I posted earlier today, I think the most likely option for Lehman is a bankruptcy filing by the end of the day today. And these derivatives trades are intended to minimize the losses to a bankruptcy filing. To that end, the trades conducted this afternoon will expire if Lehman has not filed for bankruptcy by midnight tonight.

The emergency trading session will last for two hours this afternoon. Reuters writes, "The session will run from 2 p.m. to 4 p.m. and will involve credit, equity, rates, foreign exchange and commodity derivatives. The aim is to reduce risk associated with a potential bankruptcy filing by Lehman. Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time Sunday. If there is no filing, the trades cease to exist."

I endorse this idea because it looks to me like a prudent move that would minimize the damage of a Lehman bankruptcy filing. I wish I knew how much such a filing would cost Lehman's stakeholders or how much this emergency session will limit its damage. Unfortunately, I don't know. Even if Lehman does not file for bankruptcy, this emergency session looks worthwhile because it won't cost much to conduct and if there is no need for it, the trades will expire worthless.

UAL Corp. NASDAQ: UAUA) shares were halted Monday following rumors the company was filing for bankruptcy.

MarketWatch is reporting that UAL said the rumor is completely untrue.

Apparently, an old news item on United Airlines filing for bankruptcy somehow resurfaced on the Chicago Tribune newspaper Web site, CNBC reported. The sell-off nearly wiped out the company's share price, as UAUA, which opened trading at $12.17 this morning, plummeted (according to original reports) 99.92% to 1 cent before being halted. Since then most reports say the stock plunged 76% to $3 (see update for clarification).
[Update 12:35 pm: United issued a statement, saying that the bankruptcy reports are "completely untrue," and that it was actually the "irresponsible posting of a 6-year-old Chicago Tribune article by the Florida Sun Sentinel newspaper website with the date changed" (not on the Tribune site as CNBC reported).
While several sources, including Bloomberg, have UAUA stock plunging to 1 cent on the rumor, most now, including the Nasdaq site, have $3 as the low.]

This isn't the first time rumors in the age of the Internet have caused stocks to plunge, even whole markets. Just recently, Bloomberg had its own snafu when it inadvertently published its updated obituary for Steve Jobs, Apple Inc.'s (NASDAQ: AAPL) CEO. While that didn't cause any reaction as it was caught in time, last year, markets crashed because a website reported of an imminent U.S. strike of Iranian nuclear installations.

With irresponsible borrowing and excessive leverage threatening the financial well-being of so many families, at least one county may be joining them in the soup line.

Jefferson County, Alabama, with a population of 662,047, according to the 2000 U.S. Census, is preparing for a possible bankruptcy filing, according to The New York Times.



The culprit? $3 billion in bonds with rapidly escalating interest rates resulting from the exact same short-sighted financial planning that got so many home owners into trouble: adjustable rate loans (In this case, auction rate securities) that require higher interest payments as interest rates move up. The current turmoil in the credit market has sent the county's rates as high as 10%.

Bloomberg News reports that Uno Restaurant Holdings -- which operates Pizzeria Uno -- is the latest in a string of restaurants that can't stay afloat as consumers reverse splurge on their recession diets. It follows Bennigan's and Steak & Ale among those national restaurant chains that couldn't feed banks' hunger for loan repayment.

Bloomberg reports that Uno won't pay the interest due on its debt as scheduled, and S&P downgraded it as a result. It wrote that Uno "will delay paying interest, making use of a 30-day grace period allowed in the terms of its $142 million of notes due 2011, according to a statement from Standard & Poor's. S&P cut Uno by two levels to CC and said it would downgrade again to its lowest rating of D if the West Roxbury, Massachusetts-based company fails to pay on Aug. 15."

In addition to Bennigan's, Bloomberg reported that a big Pizza Hut chain filed for bankruptcy this month -- "Ohio-based Midland Food Services LLC, the operator of 92 Pizza Hut restaurants." I am a big fan of Uno's pizza and its nachos, but I guess that Uno has borrowed more money than its declining sales and rising food and labor costs permit it to repay. It remains to be seen whether it can renegotiate terms with its creditors.

If not, it will probably join its brethren in taking the hit for a lousy economy that's likely to get worse.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.