One of the top U.S. business stories Monday involved a Credit Suisse analyst predicting that NYSE:GM could go to zero in its restructuring process. Which would mean that over $2bn of equity value could be wiped out as debt restructuring could lead to current equity holders being diluted to oblivion. Of course in return for equity stakes, creditors would agree to haircuts on their principal.
Which would reduce the debt burden and help restructure GM's business for survival... at the expense of current shareholders and creditors. Wait a second. So there is a non-government method to save the automakers. And taxpayers don't need to foot the bill? Creditors and shareholders foot the bill and provide the concessions in order to salvage the remaining value of the company? Amazing this system we have.
Wonder why our system's basic functioning eludes most who argue for a government auto bailout as if it's the only choice.
Shareholders get wiped out, as they deserve to be if indeed GM is worth less than its debt, creditors convert their debt to new equity, and there you have it - GM can reduce its onerous debt burden. So where's the problem?
Ah yes, the UAW. They refused to have pay rates competitive with other U.S. autoworkers in 2009. A bankruptcy and associated restructuring as described above would force them to negotiate contracts on similar terms to most workers in the USA. Thus their fear of bankruptcy and the widespread promotion of the nonsensical idea that "bankruptcy is not an option". Not an option for whom?
Bankruptcy doesn't usually mean the death of a company, nor the firing of all its workers. Somehow these basic points, plus the point that UAW members have benefits well above the average American, have been obscured in order to persuade Americans that a government bailout is needed. Hopefully understanding why GM shares could go to zero can help illuminate the fact that we already have a system for restructuring distressed companies and making them viable again - bankruptcy.
