Michael Levine has a must-read piece in today’s Wall Street Journal explaining why bankruptcy reorganization is the only option if General Motors is to be saved.
First, as Levine notes, G.M.’s problems are so complex that simply pouring cash into the company isn’t going to be enough to fix what’s wrong:
GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.
GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota’s.
Foreign-owned manufacturers who build cars with American workers pay wages similar to GM’s. But their expenses for benefits are a fraction of GM’s. GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it’s not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.
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The cost of terminating dealers is only a fraction of what it would cost to rebuild GM to become a company sized and marketed appropriately for its market share. Contracts would have to be bought out. The company would have to shed many of its fixed obligations. Some obligations will be impossible to cut by voluntary agreement. GM will run out of cash and out of time.
As Levine notes, what General Motors is essentially asking the Federal Government to do is fund its ability to do this. However, it would be an entirely piecemeal project, with no guarantee that G.M. would ever be able to obtain the voluntary agreements, or exemptions from federal and state laws, that it would need. More importantly, it would, by necessity take place over such a long period of time that there would be no sense of urgency on either side of the table. The cash will be spent, and G.M. will come back to Washington for more money and more time.
There is, as Levine notes, a way out of this morass:
If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM’s viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn’t be easy but, unlike trying to bail out GM as it is, it wouldn’t be impossible.
More importantly, we don’t need to go into this blind. James Wood outlined a pre-packaged bankruptcy for General Motors that, at least on paper, makes a heck of a lot of sense.
Now, much attention is being paid to an article by Jonathan Cohn in The New Republic where he argues that a G.M. Chapter 11 may not be possible because of the ongoing credit crisis:
One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, “Bankruptcy need not mean that the company disappears.” But, while it’s worked out that way for the airlines, among others, it’s unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can’t build cars without parts, and it can’t get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.
Now, Cohn is correct that General Motors would face a serious problem if it were unable to obtain DIP financing, but I don’t find his argument persuasive, offers it merely as a worst case scenario and presents absolutely no credible evidence that it would, in fact happen.
Even with the credit crisis, there are plenty of reasons why lenders would be willing to provide DIP financing to an entity like General Motors, which has, notwithstanding its financial problems, a tremendous asset base that would be worth something even in a Chapter 7 liquidation scenario. Why ? Because DIP lender typically receive what bankruptcy practitioners call “super-priority” status, meaning that they would get paid before any one else does in the case of a reorganization, or even a liquidation. Thus, the risks to the lender aren’t nearly as high as they would be with conventional financing — not to mention the fact that DIP loans typically carry interest rates far above the market average to account for the inherent risks of bankruptcy financing.
In other words, if General Motors really were incapable of getting DIP financing under any terms at all it would be a sign that the company was far sicker than we’ve been led to believe, and therefore probably not worth saving at any cost.
However, even if that were the case, it would seem to me that the solution is not a bailout that merely throws cash at the rotting corpse of a company burdened by the legacy of glory days that haven’t existed for more than 30 years and aren’t going to come back. At the most, as Dave Schuler and others have suggested, the best solution would be for the government to guarantee the DIP financing in some fashion and then sit on the sidelines while the bankruptcy case proceeds forward.
Will it all be painful ? You bet, but would be even more painful if we threw $ 100 billion in taxpayer dollars at the problem only to find ourselves in the same situation in a year or two.
And to the proponents of a bailout I ask one simple question — what makes you think that 535 Congressmen and Senators, 1 President, and countless bureaucrats who’ve done nothing but work for the government all their career know the slightest thing about running a car company ?
