Six Reasons Why GM Should Declare Bankruptcy

Just a few months ago, bankruptcy was "not an option," according to General Motors (GM) CEO Rick Wagoner. Suddenly, it's an option.

What changed? Plenty. Car sales so far in 2008 are worse than the automakers expected. In addition to the $13.4 billion in government aid that GM has already received, the firm now says it needs as much as $25 billion more. And in GM's annual report, it acknowledged that its own auditors now doubt that the company can survive as is.

A dire scenario. But if GM declared bankruptcy, it may not be as catastrophic as Wagoner and other GM defenders have insisted.

First of all, a bankruptcy filing doesn't mean GM would liquidate all its assets and shut down. A Chapter 11 filing gives a firm a chance to shed debt and reorganize, and more than two-thirds of firms that declare bankruptcy come out of the process as a healthier, standalone company, or as a viable part of some other company.

The catch these days is getting the financing needed to continue operating while in bankruptcy. With loans scarce, a lack of adequate financing is what doomed bankrupt companies like Linens 'N Things and Circuit City, forcing them to liquidate.

But if GM filed for Chapter 11 protection, there's a high likelihood the government would provide the financing - and get a better deal than if it simply loaned GM more money as part of an open-ended bailout. Here's why:

The bankruptcy courts are equipped to handle companies like GM. "Reorganization under Chapter 11 is a fairly efficient process, especially for large firms," according to a new book, Restoring Financial Stability, compiled by New York University's Stern School of Business. It hasn't been a useful option for troubled financial firms like Citigroup (C), AIG, and Bank of America (BAC), because the financial crisis erupted so quickly and a hasty Chapter 11 filing would have been devastating to thousands of other firms that had financing deals with the banks. But GM has already been restructuring for years, and third-party companies are fully aware of the automaker's problems.

Bankruptcy would help GM accomplish what it needs to do. In addition to building more popular cars, GM needs to renegotiate billions in debt, slash the number of dealers, and reduce costly healthcare benefits for workers and retirees. It's been trying to do that for years - but the glacial pace of negotiations has made it impossible to move fast enough. A Chapter 11 filing would give a bankruptcy judge and appointed stewards of the company the power to force concessions that otherwise might take years longer to achieve - or never happen at all.

The feds can still provide aid. In Restoring Financial Stability, bankruptcy experts Edward Altman and Thomas Phillippon argue that the government could offer financing once GM has declared bankruptcy - with assurances that a bankruptcy judge will force changes. "This is far more reassuring," they write, "than a Band-Aid bailout that will not materially reduce the public's uncertainty about a possible liquidation." GM could even work out a "prepackaged" bankruptcy with the feds, so that financing materializes the moment GM files for Chapter 11 protection - which would minimize concern among car buyers that GM would go out of business and fail to stand behind its vehicles or honor warranties. Altman and Phillippon estimate that with proper financing, GM could emerge from bankruptcy in 18 to 24 months, and be much healthier than if it shambled along in bailout mode indefinitely.

It would reintroduce a heavy price for failure. One unsettling characteristic of Bailout Mania has been federal intervention that absolves wayward firms of the consequences of bad decisions. Citigroup, AIG, and many other troubled firms would already be bankrupt - thanks to horrible gambles made at the peak of the housing boom - if the feds weren't propping them up. That's a major break for investors, executives, and creditors who loaned these firms money without verifying that it was a wise investment. Many analysts worry that by bailing out executives who made foolish mistakes, it will set a corrupt precedent and encourage more reckless behavior.

A GM bankruptcy would completely wipe out shareholders and force a "haircut" on debt-holders who should have been more diligent in their dealings with GM. It might also mean that Wagoner and his management team move on. To some, it would seem unfair for the feds to bail out big banks, while imposing bankruptcy on GM. But like it or not, banks are a special case, since they provide the liquidity that keeps the capitalist heart beating. Manufacturing firms do not.

It would answer the question of what to do about Chrysler. Detroit's No. 3 automaker is in worse shape than GM, with a much smaller global footprint and a less compelling case for survival. Chrysler, which has received $4 billion in federal aid and wants $11 billion more, is owned by a deep-pocketed private-equity firm, Cerberus Capital Management, which raises questions about why U.S. taxpayers should bail out a privately owned company. If GM were forced into bankruptcy, Chrysler would have to swallow the same medicine. (And so would Ford (F), if its own problems got bad enough.) And unlike GM, there's a good chance that Chrysler would be split up and sold off in parts. That's bad news for Chrysler employees, but it would probably be better to have two healthy domestic automakers than three struggling ones.

It would begin to eradicate the specter of Lehman Brothers. When the notorious brokerage firm failed last September, it set off a panic among investors who feared that a cascade of failures would follow, causing vast losses. That nearly happened, and was preempted only by a confusing set of stutter-step government interventions that left federal coffers drained and nobody satisfied.

Investors clearly worry that another large failure could send the markets into a tailspin all over again. But GM is different from Lehman Brothers. If GM declared bankruptcy, it need not be a chaotic, unpredictable mess; compared to Lehman's failure, it might seem downright orderly. Careful pre-planning could set GM up for success once it comes out. It would send a powerful message to other struggling firms hoping for a bailout: Solve your own problems. And it would bring some satisfaction to taxpayers tired of watching corporate titans exonerated for their mistakes. Finally.

Disclosure: no positions

Comments

[Between The...:]

GM sold 8M cars worldwide, but only 3M in the US in 2008. Every year from 2001-2008, GM sold less cars in the US than the year before, even with the US GDP growth, debt bubble, and consumer spending binge (61% more cars sold in US in 2001 than 2008). The $25B would be a subsidy of nearly $10,000 per GM car sold in the US in 2008, and many analysts think that the $25B number is still not enough. If that doesn't say broken business model, what would?


On Mar 09 01:43 PM Concerned GM Owner wrote:

> The recent bailout monies have done nothing to stave off GM’s failure,
> and have had no effect on stimulating the economy. What good is
> another stimulus directly to the corporate giant going to do? And,
> what does the tax-payer get for the money?
>
> Certainly, this type of stimulus is not helping our ailing economy.
>
>
> I have a better idea. GM sold 8 Million cars and trucks in 08.
> If you divide the 25 billion they are asking for by the number of
> cars sold last year, you come up with $3,125.
>
> Instead of pouring good money after bad, how about offering 8 Million
> Americans a $3,125 a government stimulus coupon? Such a coupon would
> be redeemable only towards the purchase of a new GM car or truck.
>
>
> It comes out to the same price, but by doing it this way, you are
> not only keeping GM working, you are also actually doing something
> of value towards stimulating the economy both physically and conceptually.
>
>
> The same method can be applied to AIG as well as mortgage bankers.
> Instead of paying the corporate entity directly, I think we should
> put vouchers into the hands of people needing the service; and thus
> prime the gears of our free-market system.

Mar 09 02:54 PM

[User 158164:]

Where do you get the idea that auto workers don't pay into social security. That's government workers, you dope.


On Mar 09 02:19 PM 1uncle wrote:

> Auto workers should work until they are 65 or whenever social security
> kicks in at their time of retirement and then get a pension for the
> number of years worked prorated. They should also pay into social
> security, which should be less cost automakers.

Mar 09 02:56 PM

[User 158164:]

Yeah, Dell and HP produce a LOT of products in the US. Who's dispicable?

BTW, moron, most of GM's US plants are outside of Michigan.


On Mar 09 02:54 PM elcopone wrote:

> BabyRay your post below is dispicable. You are part of the problem
> that plagues the USA today - fighting for self interest above the
> interest of the nation as a whole. You are either a UAW retiree or
> a GM employee. Your reasons make that very clear. I will refute each
> of your points but this time with the interest of the entire USA
> at heart, not just Detroit.
>
> 1. Plenty of companies offer the same thing. So you are saying to
> save ANY company that offers those things? Also, last I checked GM
> was shedding jobs faster than any company in the us, and the jobs
> that are left are being shipped to Maxicao and China.
> 2. Who cares? Why does the government care? Why are they taking over
> the fund if the go Chapter 11 (this is the clear and obvious tell
> that you are a UAW retiree).
> 3. Lots of ways to attack this but.. 1 million people? Where do you
> get that figure from? Oh wait, from Wagoner and his doom and gloom
> scenario that completely ignores the way A: Chapter 11 bankrupcy
> works and B: the way capitalism works (meaning there will be investors
> to consildate the industry so that every single person who has anything
> to do with auto's is not unemployed).
> 4. Why save those rotting symbols of American laziness and inefficiency?
> How does not going into Chapter 11 save those cities? You may want
> to ask your boy Wagoner why he is making cars in Canada, Mexico,
> and China, not the US taxpayer for another handout.
> 5. The "last great American Manufacturing..." Are you crazy? You
> really are drinking that Kool-Aid! What about a little company called
> John Deere? Ever hear of another company called Catapiller??? Dell?
> HP? AMD? Intel? GE?
> 6. Those foreign companies provide jobs moron. You know, there is
> an entire country of your fellow Americans outside of Michigan that
> need jobs as well. I mean how selfish can you be.
>
> You sir are the exact problem with GM, the US Auto Industry, and
> the US in general. Lies, manipulation, greed, and deceit.

Mar 09 02:59 PM

[Teutonic Kn...:]

We wouldn't have to behave like that Japanese young man's story reported by Mike Wallance on CBS News some years ago.

The story had it that in Tokyo, Japan there was a young man who got laid off by his employer. Now I suppose in then Asian culture face was most important. Being laid off was considered as a failure and shame in the midst of an "encrouching" feudalistic cultural backdrop.

So the poor soul had to get up early in the morning, put on his jacket and pretended that he still had a job and got out of the door as if going to work as usual. The poor guy had to please his parents and siblings, as otherwise he would be looked down.

In my humble view I think that GM would be better of to prepare for bankruptcies as soon as myself and others urged them to do las fall. We in America have more tolerance and understanding with failure, which is only a step to the next success. Our great inventor Thomas Edison had numeroous failures with the light bulb before he finally found that solution which lights us all up!

Mar 09 03:02 PM

[babyray:]

I have 6 reasons to keep GM afloat:
#1 - The U.S. government would have to take over 100 Billion dollars in Pension funds.
#2 - The U.S. government would have to pay Unemployment Insurance to another 1 Million people.
#3 -Why destroy a U.S. company that has been employing Americans with decent wages and benefits for 100 years.
#4 - We all saw what chapter 11 did for Circuit City in a matter of weeks.
#5 - Its a small percentage LOAN compared to what was given to AIG,Citigroup, & Bank of America and the rest of greedy wall street that started this mess.
#6 - A way to stick it to the unpatriotic southern GOP Senators who wont give a American company a loan but will give Tons of tax breaks to foriegn companies to build their plants in their states!!

Mar 09 03:36 PM

[Tomcat101:]

GM's sales are already horrible with just the threat of bankruptcy looming. I can't imagine what they'd be like once it actually happened. I know I wouldn't buy GM in that situation. It would probably be a great thing for Ford though as customers spilled over to them.

Mar 09 03:45 PM

[Brodie:]

Letting GM go into bankruptcy is exactly what the world, not just America does not need at this point in time. The very thought that this massive organization could be on the brink of failure has everybody leaving their hard earned money in their wallets. The failure of AIG would not signal consumers that problems exist as clearly as if GM went into Chapter 11 protection, as a significantly small portion of the world actually know what AIG stands for. Yes GM has significant debt, but to wipe out pensions owed, and to give all the small Ma and Pa investors in GM stock a "haircut" would signal to the whole world that investments in the stock market are poor.

The suggestion that we need to wipe out yet another American auto manufacturer is particularly irksome. Strength in American industry is based in part in competition and weakness grows where the demands for innovation and research and development are set aside by the growth of huge multinational corporations who are able to collude thus limiting development. Planned obsolescence developed as a result of the failure of companies like Packard, Hudson, Studebaker, to name a few who in their time were leaders in innovation. The very strengths that allowed us to win world war II and become the worlds most powerful nation was based on this competitive spirit.

Mar 09 04:22 PM

[Victor84:]

If all the parties involved do not radically change, then a government backed Chapter 11 filing is the best solution.

Future viability is the main issue. If it were as easy as lending another $20+ billion at the company to weather the storm, then it wouldn't be such a big deal. Do you realize that even in the best of times this company lost huge amounts of money? Does anyone have any long term faith in GM management? Does anyone believe that this company will be profitable ever under even these semi-compromised situations? GM has steadily been losing market share and their legacy costs and image will not change quickly (if at all).

Look, GM is not going away. But bankruptcy really works (see: airlines). They will emerge smaller and more nimble and ultimately this could jump start their image of the "New GM".

Mar 09 05:30 PM

[Mister Jimmy:]

GM sells 6 of the top 20 selling vehicles in the U.S. and contractors who rely on trucks to earn a living (unlike a lot of you self-appointed suto industry 'experts') prefer GM and Ford trucks. They regard the Honda Ridgeline and Toyota Tundra as generally 'inferior'. So, before you run your mouth or keyboard about GM and American vehicles being inferior, base it on something other than your bias and perceptions.

Mar 09 05:34 PM

[babyray:]

Please the computer companies do not make their computers in the USA and dont compare the amount of employees at Catipillar or John deere to GM. The Big 3 are the last great manufacturing companies left in this country after bad trade agreements have destroyed our manufacturing sector. Nothing is made here anymore just go to Wal-mart and take a look!!!as for the transplants (Toyota,Honda & Nissan) dont compare the amount of employees in a couple of ASSEMBLY plant to the Assembly,Metal Fab, Foundries,and parts plants that the big 3 have. Never mind the American made part content of each vehicle and the profits that go overseas!! Be American! Buy American !! Drive American!!

Mar 09 08:17 PM

[cs in sb:]

I agree that bankruptcy would be good, it was good for the airlines. I realize that buying a car is different than buying a ticket for a flight. After all, you own a car for a long time but only fly for a day. But lets face it, GM is not building cars that people are flocking to buy. Many jobs are at stake and most of the public seems to realize that instead of wasting more taxpayer money, let GM reorganize under bankruptcy instead. If there was a SERIOUS grass roots effort to encourage buying American cars to save American jobs, most people would be willing to do it. I am sure they would do it if GM would do ONE thing. If GM is really serious on building an American car that would sell to picky US buyers, I think they would be better off copying a bestseller. Like a Prius knockoff. If Palm thinks they can improve on the IPhone model, why can't GM take a Prius or Highlander and make it their own, only better? Isn't that the American way? Currently, GM cars are NOT something I would buy. They are too clunky. Attention GM! Stop building for the Camaro muscle car crowd of the '80's and start building the cars for today's latte swilling eco vegetarian!

Mar 09 08:45 PM

[303820:]

All the brainless Toyota republicans are out to night.. can anyone explain to me why the Asians are asking for bailouts? ops...loans?

Mar 09 09:17 PM

[303820:]

Can Sen. Shelby's army explain why the foreign car manufactures are not selling any cars?

Mar 09 09:19 PM

[303820:]

Can you all explain to me why Ford with a $94 billion debt should survive... and GM with $67 billion debt should go bankrupt?

Mar 09 09:23 PM

[303820:]

Could it be that if Detroit comes out of this YOUR Asian auto manufactures could pack and go home?

Mar 09 09:26 PM

[303820:]

You've succeeded in under cutting the American auto workers...but you have failed in their destruction...start packing!!!!!!!!!

Mar 09 09:31 PM

[Victor84:]

Their U.S. brands

Buick, Cadillac, Chevrolet, GMC, Daewoo, Hummer, Pontiac, Saab, Saturn

Just my opinion, but Buick, GMC, Hummer and Saturn need to go.

Legacy pension costs need to be restructured further.

Bondholders need to swap debt for equity.

In the case of Chrysler, their parent company Cerberus better inject some private capital of their own or the government gets senior senior debt.

Mar 09 09:58 PM

[PeteK:]

JL,
If and when the day GM files for chapter 11, this country
will celebrate with a Big sign of Relief.
Also mean the Sucking Sound will stop.
Stock Market may welcome that. Who knows !!

Mar 10 02:35 AM

[Brodie:]

I totally agree with you on this writeup as my father born in 1922 survived the depression of the thirties but was forever changed by that ordeal. He was ultra conservative in his spending always assuming that a repeat of the depression would not find him loosing the farm as Grandfather did. He described the conditions then as so severe that the community where he was raised Delburne Alberta) could not afford to replace the school windows after a hail storm smashed them out. He told me that Calgary Alberta had a population of 60,000 persons. He said the soup kitchens ran twenty four seven there to try and keep people alive. Now there's a million people in Calgary.


On Mar 09 11:52 AM Husker Mark wrote:

> Car sales jumping when credit becomes more readily available is an
> assumption, no more. There may be a difference between "expectations"
> and "reality" this time around. Don't get me wrong. I do hope that
> the world economies wil spring back to "normal" when this is all
> over; I am basically an optimist at heart. But I have an uneasy
> feeling that this time will be much different from recessions of
> the past.
>
> I remember the OPEC oil embargo in the early 1970s that had a lasting
> effect on consumers' energy usage. Many Americans, my friends and
> myself included, believe that while freedom means being allowed to
> make personal choices such as buying an SUV if you want. But we
> remember...and we buy fuel efficient small-to-midsized sedans instead.
>
>
> It may not come to pass, but it is highly possible that some segment
> of the population will dramatically change their buying habits for
> the long term, not just until things get back to normal. We could
> argue about the size of the affected population segment but since
> there just aren't any historical reference points that are guaranteed
> to be accurate, we'll just have to wait until the dust settles a
> few years down the road. If "my assumptions" that buying habits
> will be changed by a large enough number of consumers, the assumption
> of a big jump in car sales any time soon doesn't work.
>
> On the other hand, there is also the possiblity that more Americans
> will get patriotic and start buying more American-built cars in order
> to support jobs at home. While I would like to see this come to
> pass I won't hold my breath. That is not to say that I don't believe
> it could happen, but again, American auto manufacturers will need
> to compete better on all levels to achieve a lasting improvement
> in image among American buyers. Quality, comfort, and price will
> all need to improved and this will take time, maybe as much as a
> decade, to have a meaningful impact on consumers' perceptions.
>
>
> I suspect that we are going to form a base, probably higher than
> where we are today, but definitely much lower than where we were
> prior to this recession. Growth can then be initiated from that
> new baseline. This may not be as bad as the Great Depression but
> there are many indications that this recession will be longer, deeper,
> and harder to rebound from than any other economic slump our nation
> has encountered in the past 100 years.
>
> The Great Depression "changed" people. It changed their spending
> habits. It changed their saving habits. The changes I expect we
> will experience this time around will probably be muted in comparison.
> But to expect no change at all is, IMO, a pipe dream.

Mar 10 02:39 AM

[User 370252:]

Sort of...survival of the fittest. Hopefully, dealers will be able to survive. Being from a rural area, most of the local dealers are family-owned single franchises, and I suspect personal investments as well as local banks that finance their floorplans are at risk. Looks like I'm in the minority, but I have had good experiences with all my GM vehicles and will continue to support my local dealers as long as they're around.


On Mar 09 12:36 PM Jason Mathew wrote:

> Dealers cost to a manufacturer (seekingalpha.com/symbo...)
> are nominal and primarily SG&A (trade allowances SPIF's, sales
> force..etc).
>
> Reducing dealers helps dealers....indirectly the manufacturer. Example,
> a local Chevrolet has to compete with other local Chevrolet dealers
> as well as other brands. If one Chevrolet dealer was removed in Market
> XYZ, one less same-line make competitor, brand loyal customers will
> go to surviving Chevrolet dealer. Expectation are that sales &
> service at surviving Chevrolet dealer increases, profitability improves
> and surviving Dealers are now stronger (improve marketing effort
> and potentially enhance facility)and better able to compete. If Dealers
> can better compete and increase sales they ordering more product
> from manufacturer and better meet expected facility standards required.
>
>
> I'm skeptical of the above and believe this will work only in certain
> situations.
>
> GM does need to reduce dealers...concerned they will chase a number
> (currently proposed 1750) and not "take-out" appropriate ones that
> actually lead to above.
>
> In the end Dealers are the retail side of business and a nominal
> expense on a day to day basis. Winning product at the right price
> with the right cost structure is the solution, the investment to
> right size is extremely expensive and likely not worth manufacturer
> investment.
>
> A Dealers investment is at risk and it quite unfortunate it has come
> to this.

Mar 13 12:02 PM