Monday, March 02, 2009

Bankruptcy Could Actually Save GM

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.


Harvard Law Professor Mark Roe in today's WSJ

4 Comments:

At 3/02/2009 2:25 PM, Blogger bobble said...

i agree.

" . . . bankruptcy usually leads to a sharp change in management."

reminds me of the line in the movie blazing saddles where the mayor says "gentlemen we've got to save our phoney baloney jobs!"

 
At 3/02/2009 4:20 PM, Blogger OBloodyHell said...

> Bankruptcy Could Actually Save GM

And yet it won't be allowed to happen.

 
At 3/03/2009 8:22 AM, Blogger dave said...

Bankruptcy will never happen at GM!
The UAW's VEBA is an unsecured creditor, in a bankruptcy all unsecured creditors are treated equally.They will get the same chop as the bondholders, the number that gets thrown around for the bondholders is 30 cents on the dollar. The UAW will never stand for that and neither will their democratic protectors.

 
At 3/04/2009 6:41 AM, Anonymous capt dave said...

Lew Rockwell did the math on GM losses and said that GM lost $4000 on every car it sold last year. Is this a sustainable business plan? As long as we make up the losses, nothing will change. As long as GM, the unions, and bond-holders think we will keep bailing them, the hard decisions and cramdowns will never be made. If the Gov had walked away at the beginning, they might have tried to save themselves. Now they rely on lobbying and threats to keep the party going.

 

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