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.


  1. The other coyote:

    If the shareholders would throw out current management, things would be better for GM. With a zillion dollars in market cap, though, it's hard for enough shareholders to get together to get a majority. Even worse, the company's pension fund and/or 401k could be the majority shareholder.

    Either Ch. 11 or Ch. 7 is the best course for GM. Thanks for pointing this out coyote. Have you ever considered turning your blog posts into guest columns? My local paper is run by a guy named Bob Weir from Highland Village, Texas who is a solid conservative, who occasionally guest posts at, and who is a great story teller. He has a 2 page spread of op-eds, which is unusual for a suburban weekly.

    What the paper lacks are pieces with real economics (and of course sciences as well). I think you would reach an even bigger audience -- and hopefully reach the people who need some educating on the issues. I bet if you sent him a post or two, he'd turn them into op/eds for you.

  2. Andrew Budd:

    If what you said about the press supporting the Detroit 3 was true - they probably wouldn't be in this mess. There is a big difference between the sales departments and editorial departments of media companies. 99 percent of so-called journalists are ANTI-domestic who think they would damage their journalistic integrity (now there's an oxymoran) if they supported the advertisers who pay their salaries. Most are city-dwellers with small families and drive pissant little hondas and toyotas. The American family of 5 with 3 kids under 16 needs more room and utility than you can get in a Honda Civic. So if you fit in this category - the Japs don't make anything other than a minivan that fills the need- and a lot of people wouldn't be caught dead in a minivan. The Detroit three build affordable vehicles that fit the needs of ordinary Americans. The proof is in the sales figures - GM is still the biggest automaker in America. Toyota only surpassed it in worldwide sales - many of which are in third world under-developed markets. My momma used to say "good or bad, everybody gets what they deserve eventually." Every newspaper in the country is struggling to make a profit - they've already laid off most of the sales and admin staffs - the reporters are next - I sincerely hope that they too, "get what they deserve" "good or bad".

  3. joe Freeman:

    The basic premise of the original blog is entirely valid --the protection afforded the car companies by a chapter 11 filing would be better than continuing to try to operate in the chaos that now prevails.

    Whether the banruptcy courts could handle the sheer administrative volume of dealing with full blown chapter 11's for even one of the companies might be another matter without a clear exit strategy going in. Clearly the shareholders are wiped out, the bond holders will have to take a big haircut and the unions will have to take a big hit.

    But there are severe management pobems as well and excess compensstion exists at every level of management and "white collar" jobs.

    Tremendous problemes stand between now and viable car companies, but the answers are more likely to be found with these firms in chapter 11 than in bailouts that postpone the inevitable rather than solve problems

    Joe Freeman