The Road to Saving GM and the Taxpayer lies through Bankruptcy
By James A. Kohlberg
Mr. Kohlberg is the Chairman of Kohlberg & Company, a private equity firm, and a member of the Board of Directors of the New York Times Company.
There has been much discussion in the press lately about whether or not General Motors should be saved and if so, how. Bankruptcy has been much debated. There should be no debate.
The facts dictate an inconvenient truth: A GM bankruptcy is both inevitable and necessary. Only in an organized Chapter 11 workout can the company restructure both its 43 billion dollars of debt and its labor, dealer and legacy costs that cripple it as a viable competitor. And it is only in bankruptcy that tax dollars can be adequately protected by being the D.I.P. (debtor in possession) lender that ensures our bailout loan has a snowball’s chance in Hades of being returned to the Treasury. While Governor Romney’s op-ed of a week ago articulated many of the things to be done, it did not specify what role the government should have in a bailout or how to protect the taxpayer. With the auto companies testifying again before congress this is of paramount importance.
Here is what needs to be done:
1. Most or all of GM’s debt needs to be converted to equity. A company that is devouring billions of dollars of cash a month, 11bb in the last nine months alone, cannot support debt, much less $43 billion worth.
2. While the UAW has made concessions in the last two contracts, it is too little, too late (blame management not the unions) and these contracts must be brought to parity with other workers of similar plants and industries.
3. The employees (probably through an ESOP, an employee stock ownership program) and the debt holders should own the company, lock, stock and barrel.
4. Management and the Board of Directors must be replaced.
5. The company must drastically restructure, closing plants, cutting jobs, shedding unprofitable brands and closing dealerships. As an example GM has over 7000 dealers, Toyota has less than 2000.
6. The US Treasury should provide adequate financing for the bankruptcy, including guarantees of warranties for GM cars and trucks if, and only if the above conditions are met and the taxpayer can have an adequate hope that its money will not go to either subsidize debt holders or a corporate structure that has been mismanaged at nearly every level.
7. The US Government (and perhaps many State governments) must make a commitment to purchase 100% of their future vehicle requirements from US manufactures that meet low and zero emission standards, starting in 2010 and continuing for ten years. If this demand is created it will allow our manufacturing base to invest in meeting this market-creating demand, drive down costs to make these cars competitive with combustion engine vehicles, thereby creating both the jobs and energy independence the incoming administration says it desires. Only this last commitment will make the effort, sacrifice and treasure spent on pulling GM back from the brink worth it in the long run. Otherwise, in five years, ten or twenty, GM will be back again with its executives coming to Washington with another, bigger tin cup.
8. Last, the time has come for the American people to face the unsustainable truth: we cannot continue to pay for vehicles that create climate change, send billions of dollars to the Middle East thereby endangering our security, and borrow the money to pay for these vehicles from China, the Middle East, Europe and the rest of the world. Markets are exceptionally good at allocating costs and capital when all costs are taken into account. Without regulation, markets tend toward monopoly. Without all costs explicitly allocated, markets tend toward subsidy. We are behaving no different than Venezuela or Iran in this matter, both countries which subsidize the price of gasoline to their citizens. Because we do not allocate all the costs (defense and climate costs) of maintaining the free flow of oil to the users of oil, we subsidize our petroleum users, thus guaranteeing its overuse and preventing greener, cheaper technologies from being developed. Therefore, either a gas or carbon tax or both are needed after our economy emerges from recession.
Only the will and leadership is required. If not now, when? If not us, who?