GM and Chapter 11
Remember that time, after the Enron bankruptcy, when gas trading and transportation came to a halt in the US? Or when air transportation ground to halt after Frontier, ATA, Aloha, Delta, Northwest, United, and US Airways all filed for bankruptcy in a 3 year period? Or when half of California lost power when PG&E went bankrupt? Or when car production came to a halt when parts supplier Delphi went into Chapter 11?
Yeah, neither do I. That's because we have a system, that works pretty well and is certainly well-rehearsed, for corporate bankruptcies. And the number 1 design consideration of this system, the most important assumption behind the whole process, is that creditors will ultimately get more value if the company continues to operate.
GM has painted a picture that the US automotive industry will come to an end if they have to declare bankruptcy. This is complete BS. As I wrote the other day, this is an effort by management and certain other constituencies (labor, equity holders) to get the government to intervene not because it is better for the country or the industry, but because it promises to advance their interests at the ultimate expense of taxpayers and bondholders. This is a power play. Holders of the senior debt have the power and call the tune in Chapter 11. If management can get Obama and Congress to substitute themselves for a Chapter 11 judge, then management can hold onto their power.
I feel like the press has done little to call BS on this whole argument, and has generally supported the auto company narrative (don't discount the fact that auto dealers are the #1 advertisers, by far, in local TV stations and newspapers). But I was happy to see this in the WSJ, via Carpe Diem:
GM continues to argue that it couldn't survive a Chapter 11 proceeding, but the truth is that bankruptcy could boost its ability to survive. As the Obama administration considers its response to GM's request for more cash, it should be mindful of the advantages of bankruptcy that haven't been highlighted -- certainly not by GM's management.
GM executives have been saying that in Chapter 11 its network of suppliers would collapse, dragging down the rest of the auto industry with their company. But Chapter 11 has well-established procedures to deal with this concern.
Bankruptcy may be the only way for GM to fully confront its operational problems, deal with its legacy costs, reconfigure its dealer network, and achieve a viable labor agreement.
But one issue that has not been discussed much is that bankruptcy usually leads to a sharp change in management. There are turnaround teams expert at restructuring troubled companies, and they may well be more effective than GM's current management. It's no surprise GM's management isn't advertising this fact, but taxpayers and the government should know about it.
In the end, the administration needs to keep in mind that vital elements in GM's restructuring -- recapitalizing its large bond debt and keeping what cash it has flowing to key suppliers -- are often dealt with successfully by bankruptcy courts. A bankruptcy could save GM -- though maybe not its management.
