Bailout vs. Bankruptcy, Obama Edition

Barack Obama addressed the GM situation on 60 Minutes last night:

Mr. Obama: My hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan what does a sustainable U.S. auto industry look like? So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere. And that's, I think, what you haven't yet seen. That's something that I think we're gonna have to come up with.
Kroft: Are there a lot of people that think that the country would probably be better off and General Motors might be better off if it was allowed to go into bankruptcy?
Mr. Obama: Well, you know, under normal circumstances that might be the case in the sense that you'd go to a restructuring like the airlines had to do in some cases. And then they come out and they're still a viable operation. And they're operating even during the course of bankruptcy. In this situation, you could see the spigot completely shut off so that it would not potentially permit GM to get back on its feet. And I think that what we have to do is to recognize that these are extraordinary circumstances. Banks aren't lending as it is. They're not even lending to businesses that are doing well, much less businesses that are doing poorly. And in that circumstance, the usual options may not be available.

I'm going to read this hopefully. Obama's first answer explicitly includes lenders in the group of stakeholders which needs to put together a plan. And his second answer says, essentially, that bankruptcy can't work if GM is unable to line up debtor-in-possession financing, which it might be able to do "under normal circumstances".

The answer, surely, is for the government's "bridge loan to somewhere" to be extended within the context of some kind of bankruptcy, thereby providing the necessary "spigot". How else will it be possible for lenders -- who, ex hypothesi, have no new money to lend -- to play any part at all in the workout? Is there any way for bondholders, for instance, to write down the amount of debt they're owed, absent some kind of bankruptcy procedure?

I don't think it'll happen, though. Obama wants a plan from the stakeholders, including management and the unions; never in a month of Sundays will management and the unions ever come together to propose bankruptcy. If the bail-in option happens, it's going to have to be driven by the government -- and right now there's no indication that the government is driving anything at all.

Comments

[dr.doolittle:]

great logic and its complete disregard by the political class. What will they do indeed! I know! Le't cut off funding for the "war" effort. That won't hurt anybody, right? Oooooooo.....don't you just feel all that peace and love.

2008 Nov 17 12:19 PM

[Socialism c...:]

Mr. B. Hussein Obama has all kinds of conflicts of interest related to this. I guess you get that anytime you have entitlement classes and an entitlement provider in office.

2008 Nov 17 01:44 PM

[Robert Nabloid:]

Dramatic restructuring won't occur unless bankruptcy is part of the equation! The company will survive bankruptcy, but it might need a government bridge loan like Obama suggests... The problem is, I can't see Barack 'Money-is-Free' Obama letting a big 3 automaker go bankrupt as part of the restructuring because it would look horrible on front pages of the newspaper, and doesn't bode well in the eyes of the entitlement class.

What ordinary folks don't seem to recognize is that the auto industry has too much capacity to build too many cars (regardless of what size and fuel efficiency/quality) and they need to downsize to survive the economic slowdown! You can't still have the same number of people working for you and just build less cars - you need to have layoffs to slim the company down to survive. First round - early retirement folks get bought out. Then pink slips start get issued. Either way, it's going to hurt, but it is necessary.

Consumers have too much debt and are worrying about losing their homes and their jobs - no way do they need to keep buying a new car every four years... and so they won't. Consumers in America were taking on debt at an alarming rate to buy the things they wanted, spending tomorrow's earnings. They've already spent tomorrow's earnings and they are paying for it today. All the automakers will feel the pain, despite what type of cars they built. This is a much larger economic problem with unfair trade agreements making the entire American economy unable to compete, followed by an entire generation of consumers taking on mass amounts of debt that only hid our economic problems for the last decade and a half. We can't hide them forever - and now debt can be added to a long list of problems that include our inability to compete (due to unfair trade agreements) as just another problem we must deal with, but our politicians avoid it at all costs and try to use debt to dig our way out of the hole, yet all they are doing is digging the hole even deeper.

2008 Nov 17 02:35 PM