Person Who Will Lose a Lot of Money in GM Bankrupcy Says that GM Bankrupcy Would Be Bad

Via the AZ Republic:

Fritz Henderson, president and chief operating officer of GM, said that choosing the bankruptcy route would further erode consumer confidence in the automaker and "we want them to be confident in their ability to buy our cars and trucks."

In order to save the value of their executive stock portfolios, which are a large part of their compensation, auto executives are promoting the line now that consumers will for some reason stop buying GM cars if the company is operating under Chapter 11 protection.

The auto-makers real strategy is to get some kind of money, almost any amount will do, from the government ASAP.  It really doesn't matter how much, because with their cash burn rate almost any amount Congress gives them right now will not last much more than 6 months, and certainly will not be enough to reach recovery (their requests go up by a few billion each time they appear in front of Congress).  Automakers are facing potentially several years of recession, and any real restructuring would take 5 years or more (and even that is doubtful since the industry has had 30 years of notice on these issues and have not done anything).  But if they get some cash, then there will be a psychological pull for Congress to put in more.  They will say -- well, you've already put in $5 billion.  If you don't put in another X billion, that first 5 will have been wasted  (few people understand that "sunk costs are sunk" and Congress is no exception).  This is how expensive transit projects are funded.

The position that customers will stop buying the product due to some loss of confidence in chapter 11 doesn't hold up.  Most every airline traveler has flown on an airline operating under chapter 11 in the last 10 years or so, and if I can have enough confidence that an aircraft is being adequately maintained in bankruptcy, I can probably muster the courage to buy a car.  I presume the issue here is downstream warranty support.  But this is about the last thing that would ever be slashed in a chapter 11.   For God sakes, airlines have never even substantially disavowed frequent flier miles in a bankruptcy, surely a much more obvious target than warranty repairs.

I would argue that it is uncertainty that is driving any loss of confidence  (in fact, sales have plummeted already, ahead of any chapter 11).  A chapter 11 filing would actually increase certainty, as those running the receivership could quickly communicate principles to be followed in the bankruptcy, such as protection of warranties. Right now, people have a perception that in a bankruptcy, GM would go *poof*.  Once it actually files a chapter 11, the media and executives would switch modes from fanning panic to actually explaining how receivership works.

In fact, if there is any fear on the issue of long-term warranty support, it is being created by executives like Henderson who are fanning the flames of fear in a brinkmanship game to try to avoid chapter 11.  If he were really worried about this loss of confidence, he and other auto executives would be out there assuring people that their cars and servicing and dealers will also survive a chapter 11 filing.  But he is not.  This is totally disingenuous.

More on why GM should be allowed to fail here and here.

9 Comments

  1. The other coyote:

    Panic and uncertainty is what has caused the entire mess we are in. My vote is to take Henry Paulson, Bush, and every member of Congress, who beat the average American over the head with their "world is going to end" story, and leave them on a desert island somewhere - preferably so they can BS each other to death. Without the panic induced by Paulson, we might have ambled into a minor recession that folks in places like Texas, where I live, might not have noticed, then ambled right back out. Thanks to Paulson and his ilk, everyone was being told things were fine, then one day, Paulson is screaming (and has convinced the masses) that this is the Great Depression. Reactions are predictible - no one is spending any money. Hopefully, they're paying down debt instead, but one of my Sr. VPs was telling me the other day that people he knows, who he thought were perfectly rational people, have sold stock etc. at firesale prices and are hoarding $30 - $40k IN CASH in their kitchen cabinets. I agree with you 100% that it's uncertainty - although perhaps not uncertainty about GM, but about what's coming next - that is driving the recession.

  2. SmartDogs:

    The main stream media implies that if we *let* the big 3 crash, all auto-related jobs in the country will be lost... but for years now the big 3's market share has decreased while sales of US made Toyotas and Hondas rises. See here -- http://bigthreeauto.procon.org/#Chart -- for more.

    There are several interesting things one can find on the chart, one being that the salaries of the CEO's of the financially-solvent foreigns is about a tenth of the salaries of those who mis-run the big 3.

    Add to that the ridiculous number of 'brands' offered by the big three and labor costs that would - if left to run unchecked - cripple the global economy...

    ...no amount of CPR is going to revive that corpse.

  3. Benzo:

    I need a new drug.

    Despite all the objections, the moral hazards, and the general stupidity of it all; the bailouts will still happen. Watching this play out is embarrassing. The whorishness of it all! Could they grovel some more please? U.S Gov is the Supreme Pimp.

    We should first make them ride a bike to Washington DC, and then deny their pleas. No shame and no pride. Its a poor joke.

  4. Charlie B:

    The threat of bankruptcy is the only thing GM has to keep the UAW inline. A Chapter 11 GM car built by UAW members who just saw their "generous" labor contract evaporate is not on my Bucket List.

  5. HS:

    Airline ticket = $150-$800
    Vehicle = $15,000 - $100,000

    I think a vehicle requires a little more thought and confidence to purchase.

  6. Tim:

    Once again, you attempt to draw an analogy to the airlines in chapter 11; and once again, the comparison falls short.

    - An airline does not incur carry costs for banked miles in their frequent flier program. The only cost occurs for award travel, and they structure redemption terms to load balance, so that award tickets are used to fill otherwise empty seats. An automaker has carry costs associated with warranty. In other words, there is a line item to fund warranty for products sold -- before warranty claims are made. This warranty cash would become a very attractive target under a chapter 11 reorganization; because there is no assurance that a receiver wouldn't cancel the warranties to free up that cash for operations. After all, contracts are abrogatable under reorganization; and outside of legally required warranties required by California law, warranties are just contracts.

    - Aircraft maintentance is, or is supposed to be, overseen by the FAA; so there is, or should be, very little risk because of the external oversight.

    - A used airline ticket has zero residual value. Once you take the flight, you can't sell the ticket as 'pre-owned'. A car, on the other hand, hold some value long term; depending on demand. There are plenty of lessons learned on declining/shuttered brands and their residual values. Assuming a buyer who doesn't hold a car for 10-12 years; but turns around in 6-7 years and uses the residual value as part of a downpayment, they are not going to be interested in purchasing a car from a marque that won't be around.

    - Lastly, a chapter 11 filing by an airline has very little impact on other airlines; because their existing fleet doesn't require a healthy supply base to contine to fly. As an OEM builds product, they require healthy suppliers to continue to build parts and sub assemblies. (This holds for the transplants, too; which have ~50% of a common supply base to the domestic OEMs.) Remember that suppliers don't get up front cash for the non-reoccuring cost, and their margins are ~5-6%. Any payment cut from an OEM would push them over into chapter 11, too.

    Now, with all that being said; I'm not necessarily in favor of the loans, nor am I opposed to them. I have serious concerns about all three of the Big 3's business assumptions; and Chrylser's seem to consist mainly of "Give us enough cash to keep us afloat until we can tie up with Renault-Nissan". But I'd like to retire this "Automaker in Chapter 11" to "Airline in Chapter 11" comparison. I still go back to my first comment -- what can the Government stop doing to help the industry.

  7. HS:

    I have thought alot about how to protect my family in a time like this. I have a question. So how come it was so easy for financial companies to get a bailout? I half jokingly talked about evil on another post but come to realize how true it was.

    Money... that is the whole reason for the double standard. People, everyone, including these politicians, have "invested" heavily to make money from Wall Street.

    "For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows." - Timothy 6:10

    Maybe people here are not Christian but there can be an important explaination and lesson here. People have forgotten what money is and because we chase it, we have hurt ourselves. Money is a derivative created for trade. You work to produce something, I work to produce something, and we trade... we use money to make that easier.

    When the derivative (money) becomes more important than the underline (work) is when people want something for nothing... money for no work. Almost everyone bet on the stock market and real estate trying to make it grow... even through retirement accounts or even through their equity in their own homes. Where does it all come from i.e. where is the work being produced?

    It comes from people through companies like GM that produce something. It comes from the sweat of the machinist / assembly line worker or the analysis of an engineer. It comes from the studio designer, creatively visualizing a pleasing image. That work has been robbed, little by little, from the people and company that helped build this country. It has been robbed through the unfair-unfree markets, entities taking their "share", over regulation, the government and the financial system. It has been robbed by over compensated middle men like managers that really know nothing and can't do much except talk and look good. It even comes from the complacant few employees that make the rest of the hard workers look bad. Money is a way for these entities and parasites to rob the real hard work of the people that put their heart and life to produce something. You may have skipped all of this as I am rambling but remember this...

    People and hard work build a country, not money.

  8. brazil84:

    I can't see any bankruptcy judge letting GM out of its warranty obligations in a reorg.

  9. Jeff:

    "But no one will buy a car from a car company in Chapter 11!"

    Dude, they're not buying your cars now.