Why a Reorg is Better for GM than a Bailout

I meant to get to this fantastic article on GM yesterday in the NYT by Andrew Ross Sorkin. I’ve already written the chapter on the 1980 Chrysler bailout, and was working on the moving target of GM, Ford and Chrysler bailouts circa 2008.

Sorkin perfectly summarized the GM situation, and what needs to be done:

First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be. As an inducement, the government would allow the merger with Chrysler to go forward. (There’s a lot of resistance to saving Chrysler too, but we need to look at the industry as a whole. And don’t worry: Cerberus, the private equity firm that owns Chrysler, would have its equity wiped out too.) . . .

The automobile industry has argued that bankruptcy will be a disaster for the industry; that people won’t buy vehicles while they’re in bankruptcy for fear that the warranty won’t mean anything. There’s a fix for that too. The government should establish a warranty insurance fund that would insure the warranties of all G.M. and Chrysler vehicles bought while the combined company is still operating under bankruptcy protection. The cost to taxpayers should be next to nothing, assuming the company survives and can takeover the warranty obligations.

I should just excerpt his column and call it a day. I am looking forward to reading his book (next Summer?) titled, Too Big to Fail: Inside The Battle to Save Wall Street.

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Source:
A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11
ANDREW ROSS SORKIN
NYT, November 17, 2008
http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html

See Also:
A British Lesson on Auto Bailouts
NELSON D. SCHWARTZ
NYT, November 17, 2008
http://www.nytimes.com/2008/11/18/business/economy/18car.html

Facing a Slowdown, China’s Auto Industry Presses for a Bailout From Beijing
KEITH BRADSHER
NYT, November 18, 2008
http://www.nytimes.com/2008/11/19/business/worldbusiness/19chinaauto.html

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