GM: Bailout or Bankruptcy?

We don't like to let financial firms go bankrupt because bankruptcy shuts down their business. Buying and selling financial assets is what they do, and bankruptcy requires that financial claims be largely frozen while the court sorts it out.

By contrast, there is no good reason not to let non-financial businesses go into chapter 11. They keep running--as businesses--and emerge from bankruptcy or do not.

I understand that the argument "you saved X from bankruptcy, why won't you save GM from bankruptcy?" is very hard to deal with in a soundbite. And I believe the federal government has an obligation to autoworkers and retirees. But this obligation is not well-exercised by keeping GM out of bankruptcy.

Maybe you could call it "conservatorship" or something?

Justin Fox:

The Curious Capitalist: I've been among those arguing that GM ought to shut up about a government bailout and use the well-established bailout/reinvention tool that is Chapter 11 bankruptcy to pave the way for a better future. Now here, courtesy of the WSJ's John Stoll, are GM's three arguments for why that's not an option--followed by my analysis in italics.

1. Getting debtor-in-possession financing "would be practically impossible, given the state of the credit markets and the size of GM's obligations." Debtor-in-possession, or DIP, financing is what keeps companies in Chapter 11 alive until they've restructured their way back to better health. If GM really can't get it, maybe there's a case to be made for direct federal DIP financing for GM.

2. GM has already dealt with two of the main things that companies use Chapter 11 to fix: legacy costs and capacity utilization. That's at least partly true, but the company has dealt with these issues (fully funding its pension plan in particular) largely by borrowing money, with GM's debt going from about $9.6 billion in 2000 to more than $40 billion today. Which is why it's headed for bankruptcy without government intervention.

3. Nobody would be willing to buy a car from a bankrupt company.... Here's GM CEO Rick Wagoner... said that, in light of people's reluctance to shop a bankrupt car company, a Chapter 11 filing may actually be impossible for GM. “If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation.” Wagoner could be right about that. But again, GM is headed for bankruptcy without government intervention. So any government intervention ought to be structured like a bankruptcy: Current shareholders wiped out (they're almost there already), debt converted to equity, top management out. We could just, for the sake of not scaring car buyers, call it something else. "Government-arranged workout?" "Bailoutruptcy?" "GMerdämmerung?" "Economic stimulus?"

Comments

[Mister Jimmy:]

So, Brad, you support the $700B of Federal help for Wall Street, but Detroit should just declare bankruptcy and figure it out on their own? How did you possibly get passed over for a cabinet appointment to the Bush administration?

2008 Nov 13 08:55 AM

[Mister Jimmy:]

So, Brad, you support the $700B of Federal help for Wall Street, but Detroit should just declare bankruptcy and figure it out on their own? How did you possibly get passed over for a cabinet appointment to the Bush administration?

2008 Nov 13 08:57 AM

[GM Family:]

GM should have changed its ways long ago. Why bailout companies where the average union member has more benefits than 90% of US workers ? How many companies have a retirement package like them ? Why should the US fund these benefits ?

GM Management has does nothing right for decades - Look at all the money they made over the years and all of the money they've wasted.

GM is not what is once was - nor should it be. They need to restructure the company - yes, many people will lose their jobs. People are losing there jobs every day - why should the average taxpayer subsidize auto manufacturers ?

If we give GM a bailout - who is next ? How much money should we give to "save" poorly run companies and their workers ?

2008 Nov 13 09:22 AM

[Insiderman:]

Why wipe out equity while leaving debtors whole? The idea behind supplying debt capital isn't NO risk. Why not just eliminate all capital claims against GM, leaving the government in charge. Then, the government can IPO the new GM after reorganization?

Oh, yeah. Nationalization and re-privatization has worked so well for all those third world countries.

But, then, they did it for WAMU.

Here's the problem guys... this was a crisis of confidence. If equity holders in non-financial companies have no confidence that they will remain viable as a capital-providing class, then you will have no capital for these firms from any capital-providing class.

The Treasury and FDIC learned this lesson with the financial sector--especially with WAMU--and this is why they aren't allowing firms to go bankrupt willy nilly.

2008 Nov 13 10:03 AM

[uncle bubba:]

An open letter to Congress,


I am writing in hopes of gaining your support for the American auto
industry in general and General Motors specifically. I would appreciate your
efforts in helping our industry with a bridge loan to help through this credit
crisis. I have put together some facts and thoughts that could be useful in
your decision making process. Right now the financial analyst have down
graded GM’s corporate rating to less than junk. Just 6 months ago this was
not the case. It’s a problem that feeds on itself. If GM can secure capital to
fund operations through 2009 they should be in a position to ride out the
current recession and auto sales should rebound back and cash flow would be in
the positive again. Some people say GM doesn’t build cars that people want
and that is just not true, up until this year GM was the largest auto manufacturer
in the world and sold the most vehicles, so that argument doesn’t hold water.
Also in 2010 GM has set up to move the retirement load from its books to
the UAW which will make GM’s overhead per car in line with other manufacturers.
The talk on the street is how uncompetitive GM is but if they can hold on until
2010 this will not be the case. What GM needs is a government backed loan for
operating capital to get through the next year, just like we did for Chrysler, and
when the business turns, as it will, then the loans are paid back with interest and
GM remains a private enterprise, just like Chrysler did. Once a plan is in place
and the financial analysts see that GM has a plan and sales come back with the cash
flow then the corporate investment rating will improve and the credit crisis should be
over and GM will take advantage of the private sector once again as it always has done.
There are some who say we should let private business live or die on their own but I disagree with this. We have become more and more a service based economy
and if we lose the auto manufactures we will have lost our manufacturing backbone.
If circumstances were to present themselves as they did during World War II and we
no longer owned or controlled a manufacturing base we may be reliant upon another
country for tanks and planes and that would not be a good position to be in. Plus up to
3,000,000 jobs are connected to the auto industry, mine being one of them, and this could
drive unemployment past 10% and increase and prolong the recession if GM were to go
under today. Our economy is based on consumer confidence and consumer spending. We need the leadership of this country to back GM, give people the confidence that everything is going to be all right and believe or not, it will.

Sincerely

Mitch Mayberry
Van Matre Buick Pontiac GMC Cadillac
Sales Mgr. and Business Mgr.

2008 Nov 13 10:54 AM

[aarc:]

You are right,

This stock market sell-off is primarily caused by the FnF, AIF, Wamu, and WB govt take-overs that left investors holding the bag.

Investors are willing to lose everything in "normal" bankcrupcy as part of taking the risk against reaping rewards.

But when the govt gets into the picture and started nationalying private companies that may or may not go bankcrupt; the risk/reward equation leans heavily on the risk side.

Paulson realized that early on after AIG but FDIC went into frenzy with Wamu and WB not realizing that Paulson had already commited a cardinal sin against the investors.

Investors are waiting to be "made whole" but since Paulson is going out already; the future simply has no direction unless everybody in the govt knows what "crime" they have committed against the investors.

Govt has to provide guarantee to investors not only implicitly but explicitly. They have to guarantee investor investments much like they are guaranteeing almost everything under the sun during the last 2 months.

Next should be at least minimum guarantee on common and prefered shares such as guarantee against company bankcrupcies available to every market participant. Caveat would be big investors will have to re-capitalyze companies in trouble with additional govt incentives.

Govt cant do all the shares buying with TARP. Better to use what remains of TARP as cash reserve for the stock market investors guarantee program.



On Nov 13 10:03 AM Insiderman wrote:

> Why wipe out equity while leaving debtors whole? The idea behind
> supplying debt capital isn't NO risk. Why not just eliminate all
> capital claims against GM, leaving the government in charge. Then,
> the government can IPO the new GM after reorganization?
>
> Oh, yeah. Nationalization and re-privatization has worked so well
> for all those third world countries.
>
> But, then, they did it for WAMU.
>
> Here's the problem guys... this was a crisis of confidence. If equity
> holders in non-financial companies have no confidence that they will
> remain viable as a capital-providing class, then you will have no
> capital for these firms from any capital-providing class.
>
> The Treasury and FDIC learned this lesson with the financial sector--especially
> with WAMU--and this is why they aren't allowing firms to go bankrupt
> willy nilly.

2008 Nov 13 12:00 PM

[a. palmer jr.:]

The Chevy Volt is one example of GM thinking. They make a nice (although probably too big) plug in electric car and then stick a 3 cylinder, turbocharged engine on it, no doubt to keep us all buying expensive parts and gas for the next ten years. Why not just throw the obsolete engine and battery charger away, saving the weight, and concentrate on more and better batteries so we can again buy a car that all Americans can afford and take us completely off middle east oil.

2008 Nov 13 12:44 PM

[Ted shilmen:]

Let them file for bancruptcy like everyone else. No Bailout!
Their business model has not worked for 3 decades.
GM refused to provide products people wanted. GM refused to have high fuel ratings. GM refused to get their house in order. This did not happen over night and was not caused by the recent economy. This was a result off 3 decades of problems compounding. Regardless of whether they get a bailout or file for bancruptcy people will still be laid off and they will go back to business as usual as we have seen over and over. Then the final result will be a larger failure down the road. So let them fix it themselves or close up shop. There is plenty of competitors out there.

2008 Nov 17 12:36 PM