The White House has raised the b-word for the first time as a possible way to save financially-troubled General Motors and Chrysler.

President Bush’s spokeswoman, Dana Perino, confirmed growing speculation within legal circles that the president and treasury secretary Henry Paulson were considering managed bankruptcy, The New York Times (NYT) said on Friday.

“There’s an orderly way to do bankruptcies that provides for more of a soft landing,” Perino said. “I think that’s what we would be talking about. That would be one of the options.”

But a senior administration official later told the paper the option was a last resort in case an agreement for a voluntary overhaul of the industry could not be reached.

The preferred solution would be a forced restructuring of the industry outside of bankruptcy court, obtaining concessions [primarily from unionised labour] that would make the companies more cost-competitive with foreign automakers.

In return, the treasury would use the $700bn financial sector rescue fund, called the Troubled Asset Relief Programme, to make loans to the companies, the New York Times said.

Automakers and the treasury have been discussing a bailout for a week. Perino on Thursday said: “We’re very close.”

President Bush has said the US economy was too fragile to allow GM and Chrysler to fail and made clear that he wanted to avoid a “disorderly bankruptcy” because of “what it would do to the psychology of the markets.” But he has also said he was “worried about putting good money after bad,” and suggested he would only approve a plan that allowed the auto companies to “become viable in the future.”

Perino told the New York Times the goal was to “try to come up with something that would protect the taxpayers but not allow a collapse that would hurt everybody in America.”

But, if the autoworkers’ unions conclude they are likely to get a better deal from incoming Democrat president Obama, who takes office on 20 January and is thought more pro-labour than Republican Bush, they are likely to stall negotiations and settle for a shorter-term loan, the NYT noted.

In a traditional bankruptcy proceeding, the UAW’s contracts could be voided and the union forced to renegotiate benefits like health care, the paper added. The union has said it is willing to make concessions if GM or Chrysler gets government loans that help them survive.

Unions and the automakers are agreed – and consumer surveys have shown – that potential buyers would shun a bankrupt automaker’s cars due to concerns about future warranty, parts and service backup.

Legal experts told the New York Times that a restructuring of GM and Chrysler might be difficult to accomplish outside of bankruptcy court, given the significant steps an overhaul would require.

Meanwhile, sources have told Reuters that General Motors and Chrysler made significant progress late Thursday on a deal to secure emergency loans.

The sources said emergency federal loans for the two companies could be announced by the government as early as today.

Bloomberg News, also citing unnamed sources, reported GM and Chrysler would get US loans to survive to the end of March but would have to return the funds if they don’t comply with restrictions that accompany the deal.