The Plank

A Kinder, Gentler Bankruptcy For Gm?

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As a number of analysts have noted, the biggest reason a General Motors bankruptcy is so frightening is that it might not work out like the airline bankruptcies have. Remember, if General Motors were trying to reorganize itself under bankruptcy, it would have to come up with cash in order to buy parts. Thanks to the problems on Wall Street, that could be extremely difficult. That means GM could end up filing for bankruptcy under Chapter 7, rather than Chapter 11, and going through liquidation. The ripple effects could take down the rest of the auto industry or some significant portion of it. Unemployment would spike and the eocnomy would take yet another big hit.

But government could, in principle, provide funding as a precursor to Chapter 11 rather than an alternative to it. In effect, it would be stepping up to provide the kind of credit that would be available to General Motors (and the rest of the Big Three, if necessary) if Wall Street were not melting down. This would allow the company to take advantage of bankruptcy protection without complete liquidation. In yesterday’s New York Times, Aaron Ross Sorkin described how such a scenario might play out. It would begin by going ahead with the G.M.-Chrysler merger, which, he says, would reduce costs by $7 billion. But it wouldn’t stop there, as he explains.

The harder decisions are these: Both companies would have to jettison brandslots of them. ... That means Saturn, Pontiac, GMC and Saab would all disappear. Deutsche Bank estimates that reducing G.M.’s brands from eight to three would bring down the company’s cost base by $5 billion annually. If you’re able to shut the dealerships too, lop off another $4 billion. Chrysler is an even sadder situation: the only brand with any value is Jeep. ... In all, the 35 plants of G.M. and Chrysler would probably be cut by half....And then we need these companies to agree to serious, strict enforcement of gas mileage standards. They should be producing the cleanest cars on the street. We may lose hundreds of thousands of jobs in this industry in the near term, but with the right kind of innovation, we should have millions of new jobs in the next 10 years.Finally, we need to kick out management. That Rick Wagoner, chief executive of G.M., can say with a straight face that he still deserves to run this company is laughable. It would be impossible for him to put in place the serious changes that need to be made because he carries too much baggage. He’d have to undo years of his own neglect.After all that is agreed, and only then, the government should come in with what’s known as debtor-in-possession financing to help the company through the bankruptcy process. Ideally, the government would be a “seed investor” and others would join it.

Note that this would be a far cry from simply letting the Big Three go under without any federal assistance--the option many were urging last week. To be sure, such an orchestrated Chapter 11 would not be painless. But some pain is inevitable at this point. At the very least, such a plan would likely allow GM to operate, in some form, for at least a little while and hopefully for a lot longer. The domestic auto industry would probably survive and we'd be avoiding the very worst case scenario, which is something.

Still, whether Chapter 11 is the optimal strategy for auto industry restructuring is not as straightforward as it might seem. As I noted in my article on this subject, close observers of the industry say that the Big Three have already taken many of the steps that critics are urging and that bankruptcy would typically allow. You hear a lot, for example, about the compensation gap between the Big Three and foreign competitors operating in the U.S. But the 2007 agreement with the United Auto Workers closed that substantially by off-loading retiree health benefits into a union-run trust. Of course, the trust requires an up-front investment the companies now don't have--and, even if properly funded, wouldn't help the companies' bottom lines for a few years.

It's also not clear that Chapter 11 would provide incentives for making the kind of managerial changes that the Big Three still need most desperately. Chapter 11 can be incredibly messy and wasteful, plus it could encourage Detroit to focus more on short-term profitability--which, as it happens, is precisely what the automakers shouldn't be doing. And that's not to mention the very real danger that people wouldn't buy cars from bankrupt automakers and the possible blow to consumer confidence of such a huge corporate failure. With the economy this fragile, do we want to be taking those kinds of chances? 

So I'm not yet convinced this pre-packaged Chapter 11 strategy is the best way forward. But it's not such an easy call and, at the very least, policymakers should probably keep the option on the table. That will give them--and the taxpayers--maximum leverage over the terms of a non-bankruptcy restructuring. (I believe that this is the sort of approach Matthew Yglesias was urging recently.) Then again, this discussion is all pretty moot if Republicans decide they're just going to block this until January, when the new Congress and new president come in.By the way, in just the last few days there’s been a ton of great analysis on this issue.  Here are a few links I recommend:Portoflio.com’s Felix Salmon here and here.The New Yorker’s James Surowiecki here, here, and here.At Beyond Green, Tom Laskawy.At Newsweek, Daniel Gross and Robert Samuelson.Yes, I did just cite a Samuelson argument with approval. And, yes, it’s rare I feel the impulse to do that. But I think it’s telling that so many people from different backgrounds are converging towards a common argument: Loan the automakers money, but only if they meet certain conditions about the way they do business and the types of cars they produce.

Going forward, the questions are exactly what those conditions should be and whether, in the end, Chapter 11 should be part of that process. More on that soon.

Update: I was on Fox Business News discussing this earlier, for those who want to hear me say these things out loud and in shorter form, although I suppose if you've gotten this far you're just as happy to have read it: 

--Jonathan Cohn

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