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General Motors In Bankruptcy: It’s Not Unthinkable At All

by @ 4:17 pm on November 13, 2008. Filed under Auto Industry, Business, Economics

Jim Manzi at The Corner details just what would happen if General Motors filed for Chapter 11 bankruptcy protection:

The factories, computers, office space, intellectual property and so forth that are now owned by GM would not disappear; they would basically become the property of GM’s creditors. These creditors would sell the assets to the highest bidder. Assuming there is economic value to be created by continuing to operate the company as a business, private equity or strategic investors would buy the assets, shut down some plants, fire some union and exempt workers, and probably use the leverage of bankruptcy court to get a better deal from the unions.

In other words, bankruptcy reorganization would do what General Motors is either unable or unwilling to do now, and what a Federal Government bailout would make politically impossible; reorient the company so that it can compete in today’s marketplace.

Manzi also makes this excellent point about “fairness” in this context:

Is this fair to the people who work at GM and will now have a deal changed after the fact? Well, when people sold parts to GM on credit, or employees (individually or via union negotiations) entered into labor contracts with GM, they undertook counterparty risk. That is, they were taking, in part, a bet about whether GM would actually be able to pay them what they are owed. This is also true for pension payments, which are simply deferred compensation, as much as it is for deferred payments on credit terms for parts. To act now as if they should be protected from this risk is to treat them as children.

Of course, maybe that’s exactly what they want.

Along the same lines, The Heritage Foundation details the reasons why bankruptcy is the best option for all parties:

An administration truly committed to “change” ought to consider this option: bankruptcy. It’s not the end of the industry, but a new beginning. Here’s why:

* First, it’s really not so radical, in terms of magnitude. Yes, shareholders would stand to lose out, but with GM’s current market capitalization of just $2.5 billion, they wouldn’t lose much. Apple, by comparison, is worth $87 billion.
* Second, reorganization would put the automakers on a sustainable course. Key are labor costs: Gold-plated salaries and benefits packages for union workers mean the automakers lose a bundle on most cars sold. There’s no incentive to renegotiate when government dollars to pay those contracts are a real possibility. With a bankruptcy judge’s approval, collective bargaining agreements can be reformed to fit economic realities.
* Third, bankruptcy is the only way to restore innovation to the U.S. auto industry. In the end, the automakers make money by producing vehicles that consumers want. But any government money is sure to come with strings attached. Pelosi, for example, said the government would exact a “recoupment” for any investment of taxpayer funds — specifically, a say in what kinds of cars it produces. That’s a recipe for certain failure and future bailouts. Bankruptcy, in contrast, strips a company down to its valuable assets and then sets to putting those assets to work in the marketplace. Whether it works or not, it’s the best chance for success.

It won’t be easy for any of the parties concerned, but it’s the only way to do what needs to be done to give General Motors the ability to compete.

H/T: Wizbang and QandO

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