GM Could Benefit from Bankruptcy 33 comments
Rick Newman
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Is the Midwest about to tumble into Lake Erie?
Sure sounds that way. With General Motors (GM) teetering at the edge of insolvency, the company's backers argue that a bankruptcy filing would basically wipe out the entire U.S. auto industry. All of GM's 125,000 employees would supposedly lose their jobs, along with many times that number at suppliers, dealerships, and other companies. A congressional analysis suggests that nearly 4.9 million jobs could be at stake. I guess we should start hoarding food and fuel, because the entire U.S. economy might implode.
At least that's the dreadful scenario that auto executives, union leaders, and the Michigan congressional delegation say justifies a government bailout that would start with $25 billion and surely go up from there — with dubious provisions meant to ensure that the sprawling automaker somehow gets religion and becomes a competitive car company.
But there's already a well-established process in place for helping troubled companies like GM deal with profound problems. It's called bankruptcy reorganization. For some reason, there's an impression that this is beneath Big Auto. But in fact, the process could serve GM well, as it has other big companies. Here's how:
GM would continue to operate. A bankruptcy filing doesn't mean GM would go out of business. Some bankrupt companies do, but many write off debt, shed costs, dissolve unprofitable divisions, and emerge as healthier companies. "You get an automatic stay on many of the obligations causing you problems," says bankruptcy expert Edward Altman of New York University's Stern School of Business.
Continental Airlines (CAL) has declared bankruptcy twice and is now considered one of the healthiest airlines in the industry. Delta (DAL), United (UAUA), and US Airways (LCC) all emerged from bankruptcy far better off than they went in. Even at companies that end up dissolved, some divisions often stay in business, usually under new owners.
Workers would continue working. It's virtually certain that there will be fewer jobs at GM in three years than there are today. But that will happen regardless of whether GM declares bankruptcy. The U.S. auto industry has the capacity to build at least 5 million more cars each year than Americans want to buy right now, and much of that overage is at GM. If people aren't buying cars, jobs are going to go away no matter what. Unless, of course, Congress decides to pay GM workers even if they don't work, which, come to think of it, is something GM has been doing! Maybe that's not such a good idea.
The company would get a breather. With no intervention, GM is likely to run out of cash sometime early in 2009, which is why it can't raise financing in the ordinary debt markets — lenders are afraid they won't get their money back. Bankruptcy would give GM some relief it doesn't have right now with its creditors, unions, and dealerships. "GM is locked into a set of obligations that are unsustainable," says MIT lecturer Steven Spear, author of Chasing the Rabbit: How Market Leaders Outdistance the Competition . "Bankruptcy could give them the latitude to go to people where they've got obligations and say, 'We've been lying to each other.' " Debt would be reduced, union rules relaxed, and contractual obligations to dealers modified or canceled.
The price would be steep. In exchange for concessions, creditors and other GM counterparties would probably have a say in running the company and possibly get some kind of stake in the new GM to help them get some return on their money. They might seek to oust CEO Rick Wagoner and his management team — bad for Wagoner but not necessarily for GM, because outsiders might accomplish things that Wagoner hasn't been able to do.
Real reform would be possible. GM has been restructuring itself for at least four years, but water keeps pouring in faster than GM can bail. The company insists it needs seven of its eight divisions (it put Hummer up for sale this year), even though there's a ton of overlap between Chevrolet, Saturn, Pontiac, and Buick. Toyota, by contrast, has only three U.S. divisions, with virtually no overlap. And GM never shifted aggressively away from big trucks and SUVs until gas prices hit $4 per gallon this summer — which was too late.
A bankruptcy judge could appoint an outside turnaround team to take over GM. They'd have no hidebound ties to the GM bureaucracy and feel no nostalgia for age-old divisions like Buick or Pontiac and would retain only parts of the business that contributed to profitability. GM would end up smaller — which seems inevitable, under any scenario — but what's left would be able to support its own weight.
The feds could still offer help — with less risk. Giving or lending GM taxpayer dollars now would delay its day of reckoning but do nothing to make the company more competitive. GM could end up at the brink of bankruptcy all over again in six or nine months. But if GM declared bankruptcy and succumbed to the usual workout procedures, that might be an ideal time for the government to extend a lifeline.
Here's why: Companies reorganizing under bankruptcy protection usually rely on a kind of funding called debtor-in-possession, or DIP, financing, which is often a lucrative business for lenders because they're guaranteed to get paid back first, under a judge's watchful eye. Right now, on account of the credit crunch, DIP financing is scarce. That's where the government could step in, by immediately guaranteeing any DIP loans the moment GM filed for Chapter 11 protection.
Altman of New York University points out that the feds have a few hole cards they could play in this game, especially with the banks that have taken part in the $700 billion financial bailout. "They could use some of the $700 billion to cajole banks to offer GM some DIP financing," he says. And he argues that the Federal Reserve, which exercises some oversight of the banks, could lower capital requirements or offer other favorable treatment to those willing to roll the dice on GM. By doing this after a bankruptcy filing, the government would be supporting a company being forced to restructure, instead of one merely pledging to. And taxpayer dollars would get top priority for repayment.
The government would stay out of the car business. Bailout plans being drafted by Congress call for the government to somehow work with GM to wave a magic wand and make the company "viable." Would you buy a car designed by the government? Under bankruptcy, people who know how to handle damaged companies would work on turning GM around. Government financing guarantees could play another key role, helping to forestall one of the worst possible outcomes of a Chapter 11 filing: People stop buying GM cars.
Surveys show that car buyers would flee an automaker in bankruptcy, since they want to know that service and spare parts will be available for the life of the car and don't want the resale value to plummet. And there are plenty of competitors that would be eager to take GM's business. So an aggressive confidence - building campaign, emphasizing the plan to emerge from bankruptcy healthier, would need to change some consumers' minds. This would be a gamble, but it might be more effective than current efforts to persuade customers to stick with GM as it begs for a bailout, slashes spending, dodges bankruptcy — and tries to go on with business as usual.
Disclosure: No positions.
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This article has 33 comments:
Buisiness is War - Continue buying Foreign and your children will be speaking Japanese/Chinese. Our manufacturing and money will go over seas and we will be a third world country in a generation. US made vehicles are just as good as foreign made vehicles... I have had 2 New Toyotas both have had multiple automatic door and tire sensor problems. I have had 9 New GM vehicles and had NO issues, change the oil...The myth that the US does not build quality vehicles just isn't so...If your kids or neighbor sold candy you would support them. BUY American and the big 3 won't need a bail out...That said the Union does need to make concession and be more flexible with the economy...
On Nov 18 04:42 PM Utide wrote:
> If and when GM declares bankruptcy, right after that, can GM keeps
> on doing business and at the same time voids all the nonsense created
> by UAW ? If so, why not. It will also gives GM more time to make
> changes.
>
Doing quite well now.
On Nov 18 05:33 PM Utide wrote:
> Remember Kmart filed for chapter 11 years ago ?
> Doing quite well now.
Retirees are backed by the UAW pension fund until the mafia steals it. They are also backed by the federal government.
They are going to congress for show, they don't want or need the bailout, they need bankruptcy.
The days of 30 bux an hour for manual labor are over! If this class of workers in society do not upgrade themselves intellectually and ensure quality education for their offspring, they are doomed to becomes part of the permanent underemployed underclass.
For the last 48 years, I drive nothing but GM cars.
I hate those who destroyed GM.
That's my point.
($25.95 HOUR PLUS $6000 TO $8000 A YEAR IN BONUSSES
AS FAR AS BENEFITS AND PENSIONS? WHEN THEY (TOYOTA & HONDA RETIRE YOUR GOVERNAMENT WILL HAVE TO PICK UP THEIR HEALTH CARE AND PENSIONS.
I'VE BEEN A GM UAW WORKER FOR 32 YEARS I MAKE LESS THEN TOYOTA AND HONDA
$28 AN HOUR. WHEN I RETIRE GM AND UAW WILL TAKE CARE OF ME AND MY FAMILY...IS THAT WRONG? OR SHOULD WE BE THE LIKES OF TOYOTA AND HONDA?....USE THEM AND LOSE THEM. AS FAR AS BANKRUPSY? IF GM IF THE BIG THREE GO DOWN THE GOVERNAMENT WILL HAVE TO PICKUP 50% OF 800,000 RETIRIES PENSIONS AND THEIR HEALTHCARE BENEFIT...MEDICARE! AND AS GM GOES DOWN SO WILL YOU. I HOPE TOYOTA WILL HIRE YOU.. ME? I'LL BE RETIRED.
What if we were all union workers? Welcome to socialism.
Your biggest problem today isn't defending yourselves. Most of us out here in the real world won't buy it anyway. Your biggest problem is that these aren't isolated conversations among scattered groups of people any more. Your biggest problem is that maybe millions of people are reading letters like this and elsewhere and feeling the same way. There's no stopping the bailout, if there is to be one. I personnally wouldn't want any politician I happen to like and support to throw his career away by taking on the unions. So where does that leave us? Many, many people are probably reading this, and many may be thinking the same thing: " OK. Bail them out if you have to. We can't help what they do with the taxes they take from us. But not penny of the money I get to keep will ever contribute to one of those ridiculously big paychecks again."
You might think about getting real. A lot of people are really getting mad. We are the people. And the people don't have to fear losing your votes - you only have to fear losing our dollars. You think you're entitled to more pay and benefits than some doctors and engineers get, because as some of you have said on other discussion boards, you "work hard?" Sorry. Got news for you. Some of the hardest work there is doesn't pay very well. Outside of Michigan's parasitic little UAW empire that's the way it is. Most of us do NOT get, or have an opportunity, to get, a job right out of high school that pays like that and allows them to retire at fifty with a big fat pension and medical for life, already having made far more money than most of us will make working till we're - well, too old to work. How does this hurt us?
Companies pass on these costs to consumers. The consumer price index, our primary measure of inflation, goes up. You, of course, get your cost-of-living increases which you negotiated into your contract. So the purchasing power of your selfish overpaid butt is still intact. But the rest of us, which happen to be in the majority, didn't participate in the mechanism that drove prices up in the first place, even though our money is now worth less, too. You drive prices up for everyone then protect yourselves from the resulting inflation. By doing so you only maintain the purchasing power of your oversized paycheck while at the same time making the other 80% of us poorer. You have no incentive to study and do well in school because when you graduate, with luck, you'll make more money than someone who who did...probably a lot more. Some of you autoworkers, judging by some of what you've written on other boards, probably can't even understand what I just wrote. The end of all you've known may be coming and you won't even understand why. Because, you see, going on strike won't help you against us. You'll get no concessions from the people who are so fed up with what you've been doing to them that we will no longer buy anything you make. And the bailout? Won't matter in the long run.
Not asking you too whatever loan they get they will pay back and gm will keep paying my pension
On Nov 18 05:08 PM non-retiree wrote:
> And if <b>you</b>... happy, screw the rest of us ? Why should I,
> as a taxpayer, pay for your retirement?
On Nov 18 05:08 PM non-retiree wrote:
> And if <b>you</b>... happy, screw the rest of us ? Why should I,
> as a taxpayer, pay for your retirement?
Thousands of small and medium sized businesses at risk.
Hundreds of billions in lost tax revenues for schools, public safety, sanitation and other vital services.
Health care and pensions in jeopardy for more than 1 million retirees.
Billions in health care and pension costs passed on to taxpayers if Congress does not act and Chrysler, Ford or GM are unable to pay.
Auto industry = 4 percent of U.S. GDP, 10 percent of U.S. industrial production by value. One in 10 U.S. jobs is linked to the auto industry.
The current recession could become a depression if one or more major automakers is allowed to fail.
Many Americans won't even consider buying an American made car... even before they've formally announced their bankrupcy. My 2007 GMC Van is light years behind the quality of my 2001 Nissan Maxima. The A/C unit on the new van is the same non-digital crap that was installed 20 years ago! The cab lights don't go on when you open the doors. I could go on...
On Nov 19 12:23 AM weissass wrote:
> "Good paying jobs" are not coming back...we are not "entitled" to
> them anymore than the Mexicans, Indians, or Chinese. The Union's
> impossible demands have forced jobs overseas in order for the companies
> to stay competitive. Welcome to the downside of UNIONS!! They can
> do many positive things but in this case they're part of the problem
> along with exorbitant CEO/Executive pay. I refuse to allow my taxes
> to be wasted on subsidizing your FAILED industry.
>
> Many Americans won't even consider buying an American made car...
> even before they've formally announced their bankrupcy. My 2007 GMC
> Van is light years behind the quality of my 2001 Nissan Maxima. The
> A/C unit on the new van is the same non-digital crap that was installed
> 20 years ago! The cab lights don't go on when you open the doors.
> I could go on...
what about everybody that lost there ass
On Nov 18 05:33 PM Utide wrote:
> Remember Kmart filed for chapter 11 years ago ?
> Doing quite well now.
On Nov 19 12:56 AM retiree wrote:
>
> what about everybody that lost there ass
>
> On Nov 18 05:33 PM Utide wrote:
You said the most honest words and down right to the point.
Just look back to our almighty Steel business, Airlines, and now Automakers,
what happened to them ? All destroyed by the pwerful unions.
In fact, Boeing is facing the same right now. They never learn.
On Nov 18 06:31 PM Utide wrote:
> d.dealer,
> For the last 48 years, I drive nothing but GM cars.
> I hate those who destroyed GM.
> That's my point.
Sure, as long as there are GM cars, and you guys stay to take care of us.
Whatever I buy, I always look for the Made in The USA label. Unless there is absolutely no choice.
I support our local economy too. I always buy things locally even sometimes
it costs more. I am 100% American.
Some will be hurt by this, But hundreds of Thousands could do better in the long run.
Hey, come on, people, that's hilarious! And if the UAW tried to run it at a profit?
Can't everyone just imagine... when they form a new union...to tell their old union there will be "no more concessions?"
We should not provide 700 billion to financial at the first place. Look at what happened:
Bank stocks, insurance stocks, all lost at least 50% since the bail out.
No auto bail out please. Just go to bk. Reorganize car industry similar what airline did few year's back.
Once bail out passed, market may bounce back some but will dive afterwards.
On Nov 18 06:31 PM Allears wrote:
> d.dealer,
> For the last 48 years, I drive nothing but GM cars.
> I hate those who destroyed GM.
> That's my point.
Sadly, the US auto industry has been arrogant and short sighted, both management and unions. They continue to offer inappropriate products for too much money, and sell at a loss. Face it, Honda and Toyota have done a better job and have saved American car buyers tons of money and aggravation. For years we have purchased new vehicles because we wanted one, not because we needed one. With this economic crunch it is just too easy to hang on to the old car for a few more years. This is hurting Honda and Toyota as well. The unsold cars are piling up at the ports.
> utide,as a current gm autodealer my question is,would you buy a new
> vehicle from a bankrupt company(your not buying a box of tide) <br/>
In the heavily unionized airline industry we said for years that no one would ever fly a bankrupt airline (you're putting your life in their hands, not to mention the prepaid ticket). Then one declared bankruptcy and we found out that it was actually beneficial.
america wants to sell their products all over the worlld. remember, mac donalds, coke, kfc and the likes? it is a part of globalization. you can't capture other markets in the world, make insane amounts of profit and then close the markets for other global players in your own country.
only quality products and companies survive. people dont buy toyota because it is japnese. they buy it because it is a quality product.
GM failed to realise what the Users wanted and remained arrogant. now they bite the dust. whose fault is it?
I am not without compromise. Times have changed from the beginning of those 31 years when that promise was made. Some moderate cuts are needed both in pension and wages for GM to remain competitive. But in all my years with the company I can never remember when UAW consessions resulted in the drop of the car costs to the consumer. A compromise is a two way street.
To those who want to punish the big 3 dont forget the victims. Over 500,000 people gave over 30 years of their life to a single job. We are for the most part all over 50 years old. With no other training in over 30 years and up in our age we would be last choosen in the job market. We have spouses and children who rely on us. Dont hate us for being fortunate. I remember a time not so long ago where the promise of a pension was part of the American dream.
all these people looking down on us might get a real awakening if GM goes down. It will probably be them next.
On Nov 21 10:44 PM exauto wrote:
> I am a GM retiree. I have not even made it one year into my retirement
> and face the fact it may disappear. Some people miss the point that
> GM made a promise to me 31 years ago of a pension. Those same people
> also forget the fact that in that 31 years of work there I paid many
> tax dollars into the system. My tax dollars fail in comparison to
> the trillions that General Motors has paid into the government. They
> are no asking for a handout. They ask for a loan. A loan to be repaid
> with intrest. For GM to file bankruptcy the pennsion plan would be
> covered by the PBGC and truley would fall on the tax payers of this
> country costing far more than a 25 billion dollar loan.
> I am not without compromise. Times have changed from the beginning
> of those 31 years when that promise was made. Some moderate cuts
> are needed both in pension and wages for GM to remain competitive.
> But in all my years with the company I can never remember when UAW
> consessions resulted in the drop of the car costs to the consumer.
> A compromise is a two way street.
> To those who want to punish the big 3 dont forget the victims. Over
> 500,000 people gave over 30 years of their life to a single job.
> We are for the most part all over 50 years old. With no other training
> in over 30 years and up in our age we would be last choosen in the
> job market. We have spouses and children who rely on us. Dont hate
> us for being fortunate. I remember a time not so long ago where the
> promise of a pension was part of the American dream.
Gee. I never realized how truly noble you all were when you had all that money to go out and spend on yourselves. You guys'll never get it. You actually feel, and your union encourages you to feel, that you are somehow ENTITLED to make as much or more in pay and benefits as many successful doctors and engineers, no doubt because you "work hard." Cry me a river. I've worked hard all my life. You are no better than most of us in the rest of the country. And we've all had the pleasure of driving by your picket lines knowing that there must be a thousand people a week driving by that would love to take your damn job for half the money you were already making even without the benefits you already had.
Think I alone feel this way? Look through the feedback from the other non-union people above. A large part of the country is fed up with your sense of entitlement. Many will never buy anything you make. And guess what, Robin Hood? Guess where the money you so graciously spend came from in the first place?
I've worked and paid taxes for 37 years, 28 of that at GM. I feel I've earned a retirement or social security, I've never sat on my *** and relied on government aide for unemployment, housing, food, medicaid or anything else. I suspect that will soon change. I'm 56 years old and I want to work until I reach my,so called, golden years, but I don't know who would give me a job at this stage in my life.bNov 18 05:08 PM non-retiree wrote:
> And if <b>you</b>... happy, screw the rest of us ? Why should I,
> as a taxpayer, pay for your retirement?