The Ill-Considered Problem of a GM Bankruptcy

Let us start with the basics. Like it or not, for GM to go under risks a disaster of colossal proportions. Although Lehman, the biggest bankruptcy in US history, appeared to have an orderly settlement of its credit defaults swaps, the disruption occurred before-hand, as protection writers had to post additional collateral PRIOR to settlement. That in turn was a major factor in the horrific downdrafts in October.GM is bigger, ergo bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman hit the wall.

However, a second, and potentially far more damaging issue, may have been largely overlooked. The proponents of letting GM go argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not come to pass, and a Chapter 7 (liquidation) would be a seismic event.

We have noted more than once on this blog that debtor-in-possession financing, along with other forms of credit, has become virtually non-existent and costly. DIP is essential for most Chapter 11 bankruptcies. Why? It actually takes time to get the plan of reorganization approved by creditors and the courts. Most companies, and GM is in that category, head to bankruptcy court when they are at the end of their rope liquidity-wise.

So how do they keep the business going and also pay that army of attorneys they need to get through court? That is where DIP financing comes in. DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk (the amount spent to shepherd a company through the bankruptcy process is usually not large, relatively speaking), but many types of lending are being severely curtailed right now.

GM would be a massive bankruptcy. It is doubtful whether it could obtain enough DIP financing, which means it might be forced into a partial, perhaps a full liquidation. The ramifications are nightmarish. Aside from the loss of jobs at GM itself (100,000), GM’s business is critical to keep many US auto suppliers in business. No GM, pretty soon you see most, possibly even all. of the auto suppliers go under. And those parts suppliers are important to OTHER auto makers. Many foreign car factories would be shuttered due to loss of suppliers. Some analysts put 2009 job losses from one automaker failure as high as 2.5 million due to the knock-on effects.

Now the government could provide the DIP directly. While that idea is does not appear to be on the table, that would solve this conundrum. A government guarantee worked with Chrysler, but given how skittish investors have been over the less than full faith and credit status of Fannie and Freddie debt, it isn’t clear that guarantees to possible DIP providers would be as effective as one would hope (look, the government is already yelling at banks to lend, and they aren’t).

Normally, you’d expect the government to blink in this game of chicken. What has me worried is the demand for GM to produce a plan in twelve days. Mind you, I think the plan is a great idea. GM should say what it plans to do with the dough and how it plans to straighten itself out. But twelve days to conceive a grand strategy and price it out?

Now normally would just be part of a ritual: Congress goes through the motions of due diligence and appears to reluctantly hand out the dough, presumably after making management sweat a little and the unions sweat more.

No, what has me worried is that GM asked for $25 billion. I suspect that if they sharpen their pencils they will determine they need more (I am not saying they deserve more, but GM is a huge mess. and the guys at the helm don’t have a clue how to fix it, and with the economy tanking, even if they do all the right stuff, it will take years before you see it in the bottom line).

If they ask for more, or cannot truthfully say they will not be back asking for more (the only acceptable answer to this question) the negotiations could go off the rails. The private jet ride to DC was a warning sign that this crowd is capable of blowing a deal that would otherwise be made.

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69 comments

  1. ruetheday

    I have advocated for Chapter 11 with the government providing both DIP financing and warranty assurance on other blogs. I think it could work.

    The bigger issue here is, as you note, whether $25 billion is enough to turn the ship around. One positive sign is that in Jan 2010, the UAW will take over health benefits, saving GM $20 billion/yr in costs. However, I get the feeling that a lot of GM’s estimates are also contingent upon the market demand for new cars picking up strongly in Fall ’09 when the new model year is released, which I see as unlikely.

  2. alexblack

    Despite all the shadow-boxing going on right now, what do you seriously think the chances are of Obama and a Democratic Congress NOT giving the UAW whatever they want, come January?

  3. Anonymous

    Yves
    Bloomberg now has an article that Obama is considering a prepackaged BK with the govt providing money.

    The elephant in the room is the UAW pay scale.
    You may have noticed that all the discussions on Union givebacks have to do with pension issues. The Union we are religiously told already has a contract where new hires are at a lower rate. BUT it will be a long time til the industry needs new hires.
    Even without the pension albatross the union pay scale precludes the Big 3 from being able to compete.

    I do think that during this crisis the G7 will squeeze China, probably with tariffs, the US is going to have to reduce its blingish standard of living to a wage base more in line with other producer economies.This has already happened in the “right to work” auto factories.
    But this reduction will have to walk over Big Labor.
    And to do that is the major problem facing the first Obama term
    plschwartz

  4. Jim

    Yves, I think you’ve answered your own question. The solution is bankruptcy with government backed or even supplied DIP financing. The other issue, owners’ warranties, will be answered more convincingly with the bang of a judge’s gavel than with lame assurances from failed auto executives.

    Bankruptcy is an established set of processes for reorganizing and liquidating walking-dead companies. The system has plenty of flexibility but it’s contained within a system of rules and precedents. Finally, in this special case, the established rules can be modified at the margins by congress if need-be. Why do so many people think we’ll do better if we rebuild an entirely new system on-the-fly?

  5. Another Jim

    The problem with Chapter 11 is not DiP: as everyone says, the Treasury can provide DiP if told to. The problem is you have to enter Chapter 11 with a plan to get viable. Can these guys produce such a plan?

  6. phil

    What boggles my mind is that they went there WITHOUT a plan. For that alone they should be gone.

    Just started to read “The Shock Doctrine” by N Klein. This is the perfect industry for shock treatment but I’m not sure the country can stand the pain or unintended consequences at this time.

    East to say let creative destruction run its course but boy is that scary scenario……

  7. victorberry

    If the government lets GM and/or Ford go bust, there will be an armed revolution in this country. After all, what does the common working stiff have to lose once his pension and healthcare benefits are gone?

    At least the UAW is fighting to keep incompentent managers from driving the workers’ pay down to a third-world-like $1 a day.

  8. macndub

    Plans are a wonderful fig leaf. I suppose that’s why the communists had so many. The issue is not the plan: whatever it is, the issue is execution. And there’s no question that GM, Ford, and Chrysler cannot execute.

    However, a new management team might be able to. On union salaries, I’m agnostic. Macroeconomically, this is not the time to keep squeezing the guys at the bottom. And the “salary budget” is dominated by current and retiree health costs, no?

    Anyway, the broad brush should be that management gets creamed, shareholders get wiped out, bondholders take a haircut, and union gets a shave. Sounds like capitalism to me.

  9. Terry

    In the end, Yves, your article mystifies me, one of the few times I can say that about your excellent blog.

    For most of the piece, you argue about all the uncertainties of a likely non-DIP bankruptcy and, hence, the need for federal/taxpayer aid. Then you turn around and say “the guys at the helm don’t have a clue how to fix it, and with the economy tanking, even if they do all the right stuff, it will take years before you see it in the bottom line.” And that doesn’t even address the value of their product or service quality–mileage, technology, reliability, etc.

    Please, pray tell, explain to me and other taxpayers why we should ask our Congresspersons to support a bailout of these idiots in both management and labor at any price?

  10. Anonymous

    Those clowns are going to fail no matter what this year or a couple years down the road after a bunch of money we can’t afford is dumped into the unprofitable waste of resources. Get it over with and let the chips fall where they may. The longer CONgress props them up the worse it will get.

  11. macndub

    Terry, because the alternatives are all worse. It takes no leadership to pick the right answer when there is one.

    Leadership means taking the least bad option.

  12. Anonymous

    While labor costs are clearly an issue, I’m not so sure that wage scales are the problem. As I understand it, Honda and Toyota pay the same scale. The problem is the legacy costs: the workers paid not to work, work rules, too many dealerships, too many binding contracts of all kinds made for a market dominance that isn’t going to return. I don’t see any way except bankruptcy (with government funding) to get rid of those costs, and I don’t see any way GM can become a successful company without getting rid of them. As for coming up with a reorganization plan, bankruptcy gives the DIP more than a year to come up with a plan (I forget how much more) before giving creditors and others a shot at a plan. If the GM can’t do it in bankruptcy they can’t do it at all. As they say, nothing like the prospect of hanging to concentrate one’s attention.

  13. Anonymous

    Internet rumours of GM funding requirements are well in excess of the amounts being asked for and this will come on top of whatever package citigroup needs. The problem is that whether the auto makers are bailed out or or go into Chapter 7 you get the same result. Let GM go to Chapter 7 and suppliers fold bringing the rest of the auto industry down around them. Bailout GM and every foreign manufacturer pulls production from the US and suppliers fold bringing the rest of the auto industry down.
    The question should be how do you ensure Toyota, Nissan, VW, BMW continue to have manufacturing plants in the US. Some european sovereignties with the backing of their auto industries are getting quite vocal about possible trade tarriffs or different reserve currencies if the US auto industry is bailed. The only middle ground solution would appear to be Chapter 11 with government support.

  14. Real Paulson

    one bankruptcy at a time damn it, we have to deal with C first. jeeze can’t you people just chill, you’re screwing up this market rescue.

  15. Anonymous

    I think that chapter 7 is the best choice for the automakers. They have state of the art factories which would only come on the market in a liquidation. There are several very good car designs with tooling in place and a nearby out of work population that knows how to run the machinery. Bidding for these assets would be intense and I predict that the industry would spring to life under new ownership just as soon as the economy could support the extra production.

  16. Stephen

    Phil, I am sorry to hear you are reading such junk. Ms Kleins books are best used as doorstops or table coasters. On occasion they are useful to read as reminders of you string together a bunch of ideas under a catchy moniker and become a darling of the salon set….helps if you are TV attractive and have married into the Canadian left wing aristocracy (as she has done)

    On to other matters. Yves, thanks for parsing the issue properly…yet again. Sadly the discussion turns on too little analysis and too much ideology (anti union, anti company vs too big to fail arguments). It is nice to see some analysis of the alternatives and compare it to Lehman and what the fallouts might be as the assets slie into liquidation.

    You cannot take apart something finanically large as GM and GMAC and not expect there to be some unintended cosequences….”oops didnt see that coming” is a phrase I commonly heard out of Paulson’s office after Lehman was cut adrift.

    Its not that those are bad things, they just cause the people to run around in a panic because they are unexpected. The equivalent of uncontolled demolitions by rookies, “sorry maam, I really didnt think we would fall on the school AND the church…”

    You mention VEBA, the healthc care thing….is it money that needs to be provided to accelerate the shift to VEBA, ie GM funding the health and pension plan?

    Providing DIP fincancing as GM goes into Ch11, and funding the shift to VEBA immeadiately to provide to operating cash relief are what might allow GM out.

    However, GM shouldnt be left to their own devices. While you cannot replace management I think the government…actually the taxpayers, need a seat. You need to see someone who may not have voting power but sees where the money is going, how compensation is being set and how the audits are done…what venture fund wouldnt ask for that?

    You need a some kind of arms length government corp whose job it is to watch on behalf of the taxpayers these guys and report on progress to stated goals. These guys/gals need to be able to call bull5h!t on CFO’s, auditors and CEO’s in all these companies. I dont care if there is bad news, I just want the truth.

    But I agree, I think liquidation any time would be problematic, at this time disasterous, and that wihtout it being done right CH11 could lead to Ch 7 very quickly.

    The lack of a plan has always been the issue. There is only one car exec I trust right now and that is the head of Ford…he is new, and he did a great job at Boeing. This is a guy who understands how to run an American industrial company. Sadly the business schools produce MBA’s for Wall Street now not industry. But thats another story.

  17. vlade

    Lehman and GM are very different.
    Lehman wouldn’t have been protected by C11 (nor would any financial company), as you mentioned here in past. The collateral was being posted, but given that GM bonds now trade at 15 on par, don’t you think that the collatera there has been already posted too?

    Importantly, do you believe that the current GM management can turn the company, if they didn’t manage to do so in the last ten years under much better conditions?
    All you’d get with giving them money is something worse, a bit later.

    I don’t think it’s realistic for the govt to nationalise GM and assume all the debts as-is, without any haircut (not to say anything about giving anything to shareholders). How does that differ from C11 with govt doing DIP and attaching its strings to it?
    The reality is, GM has to change, and that will be painful, and it will cause suppliers to close and jobs to be lost. Closing ones eyes to that doesn’t make the problem go away.
    So we should talk about how to enable GM to change – and personaly I can see only nationalization or C11 (supported by govt) to do so. GM is so far down the hole, and the current environment being what it is (with profitable and good car manufacturers loosing 10-20% of sales), that the change cannot be gradual, it has to be drastic. If Wagoner was honest about it, he would say “I’m stepping down the moment someone gives us a lifeline so that an entirely new management team can rebuild GM from the ground” and not jet to DC.

  18. Anonymous

    It tells you a lot that the CEOs of the Detroit 3 flew into D.C. on private jets (of which they have many) and didn’t have complete recovery plans in hand.

    What sort of financing-intensive business doesn’t have continually updated, detailed contingency plans in place for credit crunches, anyway? It’s not like this is the first credit crunch in a generation – there was a minor one in 1998 with LTCM and a much bigger one in 1989-91 with the commercial real estate crisis.

    Of course, if they’d had complete recovery plans in hand the substance would have been totally based on wishful thinking, but still . . .

    None of the options are any good, but the least bad clearly is some form of semi-prepackaged bankruptcy filing with either a government guaranteed DIP or else Treasury-sourced DIP financing. Any funds tossed their way will go straight down the rat-hole – with the non-stop nationally televised hearings exposing the leaders of the Detroit 3 as overpaid, coddled buffoons the jig is up. They’re as good as dead already.

    Btw, I kept hoping that someone would observe that back when Bill Gates was building Microsoft into one of the most successful American business growth stories ever, he flew coach and insisted that everybody else do the same.

  19. m

    Stephen,

    “Sadly the business schools produce MBA’s for Wall Street now not industry. But thats another story.”

    And look how well that has worked out.

    At this time shooting a few financial economists and big dick swinging investment bankers might serve to introduce the requisite “moral hazard”.
    (I know I’m using “moral hazard” in the wrong way)

    I was reading one very brilliant financial economist, who claimed we need to train many more financial economists now so that we wouldn’t repeat the mistakes we have made. There is a strong impetus among all the financially educated, not to shoot their own or to devalue the “expertise” that they have deployed so “successfully”. Thus, even now the many cautionary pleas not to “over-regulate” and thus destroy the “financial innovation” that has done such a good job of “diversifying risk”.

    Speaking of “business plans”, where are the one year business plans from all the banks that have received the bailout money.

  20. tompain

    It has been interesting to hear multiple pundits, editorialists, and politicians railing against “the unions” for making labor costs too high, while simultaneously exhibiting deep concern for all the workers whose livelihoods are at risk. I especially enjoy the argument that “the companies don’t deserve help, but the workers do.” This has recently been accompanied by praise for the non-US auto cos, who make their cars in union-free places like Alabama where workers accept lower wages and temporary positions that allow them to be laid off any time. Face it, the attack on GM is an attack on autoworker jobs and wages. It’s ok to argue that all those workers should just take lower wages, but at least be honest about it.

  21. Anonymous

    As a west Michigan resident let me say that its many decades past the time, when the entrenched corruption that is greater Detroit, it’s inbred, decadent auto industry, and clueless
    toiling disorganized drones, be put
    out of their collective misery.
    The larger picture involves ending forever the incredible ‘Love of Car’
    myth, fostered by big energy, with the collusion of a century of government help. Realize,that all
    those bike paths criss crossing the U.S., were rail lines that once carried people, product, and mail. Diesel electric remains the most efficient, clean transport means.

  22. Anonymous

    There is only one car exec I trust right now and that is the head of Ford…he is new, and he did a great job at Boeing. This is a guy who understands how to run an American industrial company. Sadly the business schools produce MBA’s for Wall Street now not industry. But thats another story.

    This is the entire story. GM’s dysfunctional Ivy League MBA leadership as mal-leveraged by the Democratic influence peddling UAW leadership.

    Too few engineers and leaders, too many bean counting board room paper flippers.

    It’s not true that parts of these companies don’t know how to build state of the art factories and small cars.

    See http://info.detnews.com/video/index.cfm?id=1189

    A useful starting point in reorganization is determining what obstacles stand in the way of building equivalent and superior facilities in the USA.

  23. mmdonner

    two comments really:
    1. there is tons of class warefare going on here…why not the same outrage and concerns with AIG 160Bn.
    did they present a plan? execs flew in on private jets…tons less money, more jobs at risk. when did insurance companies get a better reputation the auto or union workers.
    2. if GM goes into ch. 11…who will buy the cars they need to sell? no one ever talks about the elephant in the room…trust in an issue discussed in other areana of bailouts…but not on auto…curious indeed

  24. mmdonner

    and the other thing that gets me is the so large percentage of the critics and pundits who are driving SUVs.

  25. Anonymous

    There’s a lot of talk about how GM is a failed company, etc., but they still sell cars, right? And a couple of years ago they were selling cars that consumers really wanted, no?

    I’m as disgusted as the next person by Detroit’s failures to produce good, desirable, more energy efficient vehicles (and I drive a Japanese car myself). But I’m puzzled by all this insistence that GM deserves to die, and that their current crisis shows this. Isn’t their immediate problem a result of the credit crisis? If they could get credit, would they be in such a precarious situation? And if the immediate problem is credit, then why the rush to dissolve GM?

    Chp. 11 with governmeent providing DIP seems both the least bad solution and the most in keeping with the actual situation of GM — not as a completely failed company but one that is in serious need of reorganization.

    I hope policy makers are reading you, Yves!

  26. Anonymous

    Here is the real unspoken problem with a bailout of the automakers-THEY ARE GOING TO FAIL BAILOUT OR NOT! This is what those who are not familiar with Detroit corporate culture fail to see. Giving money to the automakers without a complete restructuring of the companies and evisceration of executive management is sheer stupidity. Just looking at this from the financial side and the jobs side is not enough. Those jobs are essentially lost. The real question is are you going to replace them with a viable business or not.

  27. lewTerrorboy

    In July 2007, after the collapse of the 2 Bear-Stearn’s funds that precipitated what was then called the Subprime credit crunch, I remember the quizzical looks my friends gave me as I climbed into the back of their car and said: “Our lives have changed forever. Wall ST will never again, at least in our lifetimes, be trusted.”
    A bit of hyperbole, perhaps, but the point is, a nobody like me could easily see that something fundamental had changed. Yet here’s GM, with their large, extremely well-paid, coterie of accountants and lawyers, 16 months later, whining that they only have “12 days to conceive a grand strategy and price it out”.
    What!?
    The grand strategy should be to Fire all these useless yes men and ridiculously compensated buffoons. If they have no grand strategy concocted by now, when it’s been apparent to everyone else, again, even me, for Chrisssakes, that they were on the brink of failure, with no vision for the future, a failed business plan, straddled with product for a world that no longer exists, how can this infantile whining pass muster?
    Twelve days? They’ve had more than twelve months. The fact that they even have the audacity to admit they’ve done absolutely nothing to plan for just such a contingency is the best argument there is against giving them a nickel.
    It’s our money…we should take over the franchise and get rid of the dross that’s been paying huge sums of money to lobby Congress to allow them to continue on their ruinous path and drag the rest of us along with them, all the time exulting about the virtues of the “Free Market”. These people are garbage and need to be thrown on the trash heap of history where they belong.

  28. chris

    Thanks for posting these thoughts Yves. I wondered if you had any views about GMAC? GM still owns 49% of GMAC (Cerberus has the rest along with Chrysler).

    Would there be a way to separate the mortgage part from the auto part? Could they be bankrupted separately?

    During the "lever up" phase GM's earnings became dependent on its mortgage business ("Oh no! It's Ditech!"). The company really got into strange and crazy finance with the mismatches between auto leases and loans and mortgages, and no down payment interest only finance.

    They are looking to buy back mortgage stuff at 55c on the dollar. Probably too late for that.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=anIixLC0.z_Q&refer=home

    This Bloomberg item reviews some recent developments.

    There will for sure be another CDS type crisis around this.

    It may be an object lesson to underline that there is no answer to anything without dealing with the derivatives. The financial extensions of the "GM problem" will probably dwarf the combined direct and indirect costs of failure of the auto part. Saving the auto company probably will not save GMAC. Funds provided for autos would need to be segregated from funny finance. This could become a model for dealing with all the once industrial companies which dove into the world of crazy side bet finance (GE for example).

    Perhaps this old dinosaur will become a test case to see if any of the eggs it produced are fertile. If they are it will be interesting to see the creature that emerges once the shell is cracked.

  29. fresno dan

    The problem with a GM bankruptcy is that it takes everybody’s eyes off of Citibank bankruptcy. I think citibank bankruptcy couldn’t happen to a bunch of nicer of A*s*o*e*, but it would be BAD. DOW 6000

  30. Anonymous

    Big 3’s strength is SUV. SUV sales depend upon Oil prices. Low oil prices will increase SUV sales when the economy stabilizes. Let’s give em some Fed money with high interest rates. American consumers will lap up SUVs once the economy improves. Since Oil prices were a bubble and not demand dependent, this should play out well for everyone, other than our next generation in terms of increased environment clean-up costs. But, what the heck, the Fed really does’nt seem to care about the next generation.

  31. eh

    If AIG has to date sucked up $150b, then it is a certainty that $25b won’t be nearly enough to retool GM and get them through this downturn.

  32. mmdonner

    can someone please tell me/us why AIG is different (x3) then GM’s situation?? and how does the mentality of wall street vs main street play into this picture??

  33. bg

    AIG is out 150B because the government is covering their bad contracts.

    GM will be out 150B if the government has to cover their bad contracts with unions and dealerships. We don’t have to in Chapter 11.

    DIP financing is a must. If the government can’t get credit markets moving to that extent we are all toast. Bernake has said he will lend ‘directly’ (he was talking in the abstract about bypassing banks) if he has to. I do not think government covering of DIP financing takes an act of congress.

    You are right Yves. The threat of big3 liquidation is a gun pointed at the heads of the government.

  34. mmdonner

    OK bg…let’s say GM is 150b in the end..and aig (not over yet) is 150b. aren’t there more jobs involved in GM in the usa then aig? more secondary fallout then AIG? more cultural fallout the with AIG.
    why was it so easy for everyone to accept, nearly without protect or voice in media, aig’s bailout yet GM gets total flack?
    what is the underlying mentality here and why?
    ya, i drive small car and am incredibly upset at detroit, management mostly..but still the difference in volume of voice is so amazing. why is that?
    no one was cavelire in saying let AIG go into chapter 11 or what a dina it was or how the management sucks, etc etc.

  35. Warm, Dry and Well Fed

    Yves has stated the true problem; how to save the jobs when the companies are failures. Chapter 11 with government DIP financing is probably the best route, but let me add two problems. First, the big three may have 300,000 UAW workers, but the suppliers have twice as many. How do you force a wage cramdown on those companies without doing a Chap. 11 on the entire supply chain? Second, for political reasons this problem will be kicked into January. The Republicans are rightly bitter at the UAW and saying to the union “You spent 40 mil. in cash and labor to get Obama elected. Well screw you.” And all the new jobs will be in the upland south- Republican country. The “if I were king” answer is Chap. 11, zero the bonds, 25 billion to top off the pension plan, let the retirees go on medicare like the rest of us (with a “before age 66” bill in Congress), a blanket pay cut for the whole supply chain (except the engineers who can go elswhere) and a new dealer system which will wipe out most of the smaller, underfunded legacy dealers. The big three can at least break even.

    But with the sectional warfare and the union lock on the Dem. party I’m sadly betting against it. Wed. I sold my CMS and AEP. What a sad disaster…

  36. Anonymous

    1. AIG was different in that it happened in an eyeblink. If there had been time to hold hearings debating whether or not to bail it out, I think there would have been the same wild firestorm of criticism.

    2. AIG was a massive player in derivatives, and if it had been allowed to go bankrupt in a flash as Lehman did, the entire financial system of the country might have ground to a standstill in a catatonic seizure. Or not. I personally am in the “or not” camp, but our club has few members at present. In our defense, may I note that there are daily margin flows on CDS obligations so there is somewhat less total risk exposure than notional exposures suggest.

    3. AIG’s crisis struck IMMEDIATELY after Lehman went under. In truth, if the geniuses at Treasury and the Fed could do it over they probably would save Lehman to keep the “breaking of the buck” at the Reserve’s Primary Money Market Fund from triggering a run on Money Market funds across the country. In any case, in the real world without “do-overs”, the Treasury and Fed felt they could not let AIG go under in a spectacle a day or two after Lehman’s own spectacular bankruptcy.

    4. Among the paranoid, the fact that Goldman Sachs was AIG’s largest CDS counterparty and Secretary Paulson is a Goldman alum suggests that there was a bias toward not ever letting AIG default on its CDS obligations.

    5. AIG is going to be dismantled with a chain saw over time, which is exactly what should happen to GM.

  37. m

    Will chapter 11 lead to GM liquidation?

    On the one hand you can restructure the cost side (liquidate the workers and dealers), but will it destroy the revenue side also because buyers will refuse to buy cars from a bankrupt company. KDP Advisors seems to think so.

    In a recent reuters article, JP Morgan analysts rate GM Bonds a buy and think GM can make it without going into bankruptcy and KDP Advisors a bond research company says this:

    “Analysts at independent research firm KDP Advisors, meanwhile, said they expect GM will benefit from additional government loans and that it is likely to avoid bankruptcy.

    They have a “hold” recommendation on its bonds, however, due to the risk that the company may restructure its debt, or push them further down in the capital structure, which will be harmful to bondholders.

    “The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree healthcare expense, and a substantial downsizing of capacity and headcount,” analyst Kid Penniman said in a report.

    “Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees,” he added.”

    http://biz.yahoo.com/rb/081111/business_us_generalmotors_bonds_jpmorgan.html

    So do the talking heads who claim GM is going to fail anyway point us to any financial analysis to back up their claims?

  38. bena gyerek

    that jet ride reminded me of tom wolfe’s “a man in full”. anyone think they got saddle bags at the hearing?

  39. Anonymous

    F/GM prepack, with govt DIP, warranty pool, and after 1 year loan guarantees on new 5yr debt if they emerge from Chap 11 resized for a smaller market share and a 8-10MM unit SAAR. Chrysler goes Chap 7, have some lines/engines probably salable.

    Equity in the new entities given to the unfunded pension/employees, equity/warrants to current bondholders, and prefs / equity gets 0. Mgmt replaced, but agree with above poster Ford CEO worth keeping. Now UAW/employees have a stake and if fail at this point have only themselves to blame.

    At the same time, the $25bn earmarked for new tech should be used as others proposed…govt financed think tank/development group to come up with new auto technology which given to US manufacturers equally when viable.

  40. Stephen

    The more I think about it the more this is a pony in the poo problem, there is a pony in GM, it is just buried under all the poo.

    Dealers dont matter, cut em loose, I cant think of anything that is strategic about them, other than their financial contributions to the politicians. Save the supply chain, equity holders are 0, bondholders take a haircut, pension funds get bought out early at with them going to 95% of benefits. Govt provides long term loan to buy out VEBA immeadiately, suppliers are made whole (thats the value worth saving because they can supply any assembler…to call the car companies today manufacturers is not accurate.)

    Save the supply chain and the heart of manufacturing….get the pony that GM is trying to become out from under the past obligations.

    Henry Ford was right, “history is bunk”, meaning the future is really all that matters, sunk costs, past obligations dont matter if they dont affect the future. Sorry but an unsustainable promise extorted from weak minded management at GM 15 years ago isnt worth keeping.

    I will say though that if GM has figured out how to provide gold plated helath and drug plans for $120 a year per person or $252 per family then maybe they are on to something unrelated.

    Fix the problem, which is the overhead, debt and future obligations. If the government takes that on then GM can stand on its own….take some equity, put “eyes and ears only, not mouths” on the board and let them go through Ch 11.

    So who is left as CEO’s who can handle an Industrial Enterprise in America? WHo could you trust to make the right choices if you could give them the resources.

    Isnt this really the failure that America has to face now, ask the hard questions about. There is nothing.

    Interesting side story. RIM still does much of their manufacturing in Waterloo Canada. When asked why he said the labour content had fallen to a small amount, since much is automated, that the need for quality control and need to keep manufacturing mgt and development mgt and marketing mgt close to each other meant that that the savings from Asian manufacture wasnt worth it.

    This may have changed recently, but it was true as recent as 4 years ago. Mind you RIM is the ultimate, History is Bunk company. No legacy, across the board challenge.

    Oh, and to save industrial America from itself all defined benefit plans should be outlawed….too tempting for either side to screw it up, that means government pension and helath plans should be junked to defined contribution as well, off topic but this is part of the problem as well. Unsustainable promises made on some hazy and imperfect vuiew of the future.

  41. Don

    I find Posner’s analysis the best offered. I’d be interested if you think that it mirrors your own:

    http://www.becker-posner-blog.com/archives/2008/11/bail_out_the_de.html#comments

    “There are two types of corporate bankruptcy: liquidation and reorganization (Chapter 7 and Chapter 11 of the Bankruptcy Code, respectively). In a liquidation the bankrupt company closes down, lays off all its workers, and sells all its assets. That probably would not be the efficient solution to the problems of the Detroit automakers. They are still producing millions of motor vehicles per year, and if they suddenly ceased production entirely there would be a big shortage even though demand is way down. To put this another way, although at present the companies are probably losing money on virtually every vehicle they sell, at a lower level of production the price at which they sold their vehicles would exceed marginal cost.

    The alternative to liquidation–reorganization–can work well in normal times, as in the United Air Lines bankruptcy that Becker mentions. The reorganized business is able to borrow money because its post-bankruptcy borrowings (“debtor in possession” loans, as they are called) are given priority over its pre-bankruptcy debts, which are usually written down in bankruptcy, reducing the reorganized firm’s debt costs and thereby enabling it to recover solvency. The debts that get written down can include health and pension benefits, which in the case of the auto companies continue to be a big drag on profitability.

    The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into. The first problem is that the companies might have to liquidate, because they might be unable to attract the substantial post-bankruptcy loans that they would need to enable them to remain in business. The credit crunch–less politely the near insolvency of much of the banking industry–has made that industry unable or unwilling to make risky loans, and loans to the auto companies after they declared bankruptcy would be risky.”

    Lots of comments

    Don the libertarian Democrat

  42. Anonymous

    A lot of cars and trucks were sold that will be on the road for the next 10 years so use the time to reorganize. No one is going to be able to afford new vehicles from mass production, low gas prices or not

    Let the auto manufactures go under, breaking the unions and their leeching effect. Auto plants owned by Ford based in Mexico already compete with the US worker.

  43. Anonymous

    12 days for a plan is not enough? They have been screwing up for years, they knew where they are heading and they did have plenty of time to prepare all sorts of plans.
    GM needs to go into bankruptcy. That’s where bad companies have to go. Saying that it would be a mess and thus a BK has to be prevented is equal to Hank’s threatening with martial law if the $700b bailout does not go through.

  44. charlie

    C11 is not an option. GM problem are the dealers; you can cramdown everyone else but the state franchise laws will protect dealers. GM needs to kill about 2000 dealers across the country. That is probably going to cost 30-50 billion to bribe them to go away.

    C7 and quick asset sale are the only options. That will destroy consumer confidence. We are looking at 10%+ unemployment, much higher in the midwest. People will not be buying cars.

    After two years of this, even Toyota will be bankrupt. You need to address the demand side and get people buying cars again.

  45. Anonymous

    1. What is the hourly wage at UAW plants?
    Googeling I found this
    “According to the Indianapolis Star:
    Base wages average about $28 an hour. GM officials say the average reaches $39.68 an hour, including base pay, cost-of-living adjustments, night-shift premiums, overtime, holiday and vacation pay. Health-care, pension and other benefits average another $33.58 an hour, GM says.”

    A more detailed description comes from National Review (not my favorate but…)http://malaysia.answers.yahoo.com/question/index?qid=20070924073107AAuGk8O

    http://www.payscale.com/research/US/Employer=General_Motors_Corp/Salary has the median salary near $90,000.

    This is well above what we pay say nurses and teachers and well above the median US wage.

    Should the average US workrer be asked (required) to accept debt for his children to keep these workers at an inflated pay scale?
    No UAW plan discusses how this wage scale can compete with global competition except behind a tariff wall.

    If a BK settlement decreases UAW wages significantly there may be a strike but in the end there are some excellent auto factories there and in these conditions workers will emerge.

    As far as the rather silly notion of people staying away from a BK company because of warranty fears, would you take a chance and buy a car from GM with or without a 25BB bailout??

  46. doc holiday

    On the twelfth day of Christmas,
    my true love sent to me
    Twelve drummers drumming,
    Eleven pipers piping,
    Ten lords a-leaping,
    Nine ladies dancing,
    Eight maids a-milking,
    Seven swans a-swimming,
    Six geese a-laying,
    Five golden rings,
    Four calling birds,
    Three French hens,
    Two turtle doves,
    And a partridge in a pear tree!

  47. ps

    Lets put some numbers to this. AT 9/30 GM has a $60B negative net worth compared to $2B for Ford – very different situations. Both are continuing to lose money adding to those shareholder deficits so they will get worse. GM needs $58B to be on equal financial footing with Ford. $25B across the industry will not come close to solving the problem. It will set taxpayers up for sending in more $ to “protect” our $25B. It is a suckers game.

    GM needs to be an orderly liquidation. Book value of assets is $110B including $42B of net property – anybody’s guess at what this brings in an orderly liquidation. Proceeds to be spread against $169B of liabilities. LTD which is probably secured is $36B. A/P and accruals $62B, Pensions and post retirement benefits $45B. Lots of haircuts to be taken. Have suppliers filed purchase money security interests in inventory? Their losses may not be so bad. Might we need government support ot keep them viable to support the rest of the auto industry? Probably.

    Support Ford thru Chap 11 with govt provided DIP financing, support key suppliers, maintain an auto industry at an appropriate capacity and with reasonable labor contracts. The cost to do this is as fraction of the real costs to kee GM alive. $170B of liabilites and $110B of assets is not a viable corporation. Caveat – although these numbers come from GMs 10Q management states “disclosure controls and procedures … were not effective … because of identification of material weaknesses in our internal control over financil reporting.” So maybe things are even worse.

    Anyone who thinks GM should be kept alive is as out of touch as their management.

  48. Anonymous

    If GM is in such bad shape, why have they been announcing new plants opening in russia, china, brazil & india every few weeks?

    If they have "competitors" with which they "can't compete," why do they own chunks of those competitors' companies & engage in joint ventures (technology sharing, production-sharing, plant & equipment sharing) with them?

    The Big Three have done most of the heavy lifting to set up the Chinese auto industry.

    Something doesn't make sense.

    hb

  49. doc holiday

    BK is just re-org, like Krispy Kream, so the plan these retards are working on should be fairly simple, maybe simple enough for someone at Citi to grasp — all these billionaire CEOs and wall street mafia boys are so clever with valuation and compensation, so surely they must have a plan, right? These are the guys that suggest that they need more pay because they create value and they are well eduucated and experienced, so let’s see the amazing plan that will be put together by this group of people, who have the collective IQ of a grammer school in Wasilla! Bring it on babies, lemmie see what yah got!

    Don’t get me started on the Congressional medal of honor banking boobs that will review this stupidity either ….

    I know, I should offer helpful ideas and not be so critical, but the majority of these people are crooks and they really should be hung!

    I do have one suggestion, what about a labor strike?

  50. doc holiday

    This is stupid, this company is just too big and they need to reduce size and depend on fewer sales; they are over-extended, structurally and financially, they all just need to downsize and re-tool and dump management and cut wages… simple shit man.

    Does anyone think the plan they come up with include cutting pay for the people drafting this plan??? Does anyone think the board will voluntarily step down? Does anyone think these people will be honest in anything they do???

    General Motors is reporting global sales of 2.1 million units for the third quarter, which is down 11% from the same period last year. Through September of this year, GM has sold 6.7 million cars and trucks worldwide, putting the automaker further behind Toyota, which has sold 7.05 million units so far this year. The struggling U.S. market is a big part of GM’s sales woes, as 61% of the Detroit automaker’s sales came from outside of its home market. That’s up from 56% last year, but down from the 65% figure for the second quarter of 2008.

  51. sanjay

    If GM files for Chapter XI then Ford and Chrysler will have to as well. There is no way that they can be competitive with a restructured GM.

    I don’t the “plan” for the auto industry is that hard to come up with. All it requires is simple reverse engineering. They know how many cars they sell; figure out the structure that allows you make a profit selling those cars.

    The challenge is getting all the people who will be screwed to agree to it- dealers, shareholders, debt holders, workers and retirees.

  52. m

    “So Pelosi and Reid have decided to be helpful, much like a teacher telling a student how to format the answer to an essay question.

    Pelosi said that she wants lawmakers to tell Congress that, if it approves the bailout, Detroit will:
    — pay no shareholder dividends,
    — give no bonuses to employees making more than $200,000,
    — explain how they will invest in advanced technology to make more fuel-efficient vehicles.

    If Detroit bites on this, this will represent a significant and at one time unthinkable step forward in federal government control of how a private business runs itself. Think about it: This is Congress telling GM how to set corporate policy, at least for the term of a loan, which could be up to 10 years.”

    Too bad, congress didn’t demand the same from the banks. Paulson clearly hasn’t required anything.

    Yves, you are worried that this Kabuki dance may go off track. If these are the conditions Pelosi is demanding in the “business plan”, I think GM can meet them. The rest will be window dressing.

  53. Anonymous

    @Yves, beautiful mind and *****.
    The real fear of the governments and industry’s is not finance/monies, but the people eh?

    Who will be the next Patton to lead the charge against the WWI pensioners in DC.

    The first to go are the king and his friends, then the priest’s.

    No wonder the CEO’s wont give up their corporate Jets.

  54. jm

    How interesting it is that none of the commenters so far has mentioned the fact that for years US automakers and their suppliers have faced Japanese competition backed by a government exchange rate manipulation equivalent to a 25% export subsidy.

    In the five quarters of 2003 through Q1 2004, Japan expended $320 billion to buy dollars and suppress the yen, and budgeted $1 trillion more as backup (to put Soros et al on notice that they shouldn’t even think about challenging them).

    As Japan’s population is half ours, the equivalent would be for the US to expend $640 billion on exchange rate manipulation and budget $2 trillion more as backup.

    Imagine what all those “free trade” advocates would be saying if the US government did that.

    As that technique was just too blatant, Japan then shifted to a more subtle approach — keeping interest rates at near zero percent in such a way as to encourage foreign hedge funds to borrow in yen to buy dollar securities, and to force Japanese savers and institutions needing interest income to sell yen and buy foreign (esp. dollar) securities.

    With the yen having recently risen to a level where most of this export subsidy effect has disappeared, Japanese auto makers are facing dramatic declines in profitability.

    Those who think the Japanese automakers are doing a significant amount of manufacturing and parts procurement here should look at the numbers — most of the value of the cars they sell is added in Japan.

    If Congress and the executive branch had done what they should have done to stop the Japanese exchange-rate manipulation, Detroit would be in much better shape.

    And had they had the wisdom and courage to impose fuel taxes as high as those or Europe and Japan, Detroit would have started making fuel-efficient vehicles long ago. The reason they didn’t was that most of their customers didn’t want fuel-efficient cars. (Most of the imports people were buying weren’t fuel-efficient, either.)

    All those people who want to help the state-subsidized foreign competition finish off what little remains of American manufacturing should contemplate just how we will ever pay back the enormous sums we’ve borrowed from abroad. It’s kind of fundamental that we’ll have to run a trade surplus in manufactured goods. Keeping a little manufacturing capability around just might be a good idea. (Of course, we can always sell off all our land to them, I suppose, but even the most brain-dead Americans should be able to see that’s not a good idea.)

  55. Anonymous

    I think it is extremely important to preserve the UAW pay scale, which is not at all excessive. Let’s consider what they are actually making, in direct pay, of an average $US 26. That is about $US 52000/ year. A very reasonable amount for the crafts.

    People, wake up.

    It is the bread and butter of this country that has made it great. Family level wages in the US have benefitted the entire world. For all you “free traders”, why in the world would Japan, etc be targeting the US if the average wage wasn’t sufficient to develop the consummerist society.

    The US has to develop a national health care system, national pension system, and a sane trade policy, now.

    The minimum wage should be $12 per hour, starting immediately.

  56. Anonymous

    “…The winner, just announced at the Los Angeles Auto Show, is the 2009 Volkswagen Jetta TDI. This is the first time that a clean diesel model has been awarded the title Green Car of the Year®.

    The 2009 Jetta TDI breaks new ground in the field of clean diesels, achieving emissions certification in all 50 states without the use of special additives or extraordinary measures. It provides five passenger functionality with welcome levels of power and a satisfying driving experience. Importantly, it also achieves estimated highway fuel economy of 41 mpg with greatly reduced greenhouse gas emissions. That’s a rarified fuel economy number typically achieved by only the most efficient gasoline-electric hybrids. The clean diesel Jetta TDI matches this efficiency with a powerplant that’s more straightforward and affordable, allowing the Jetta TDI an affordable $21,990 price tag….”

    http://www.greencar.com/features/2009-vw-jetta-clean-diesel-wins/

    Probably runs on vegetable oil too, gas companies are not going to like this.

  57. jeff65

    JM, are you sure that buying dollars to suppress the yen was a policy designed to benefit the Japanese? What did the Japanese CB buy with those US dollars? Looks to me like Japan (and China) financed the Iraq war and US deficit spending and the housing bubble and…

  58. K Ackermann

    This would be a dumb time to let the auto industry go under.

    Someday, when the economy recovers, we can shut it down without warning no matter how well or bad it is doing just to punish them if it makes everybody feel better.

    For now, I’m not sure driving up unemployment is recommended in a severe recession.

    I just check the manual and it said that it isn’t.

  59. Anonymous

    Those who advocate chap 11 with the government providing DIP financing are vastly underestimating the warranty and perception problem. GM under bankruptcy would have a stigma and consumers would stay away as other car dealers would always be bad mouthing GM spreading rumors that they would go under.

    Even if 70% of people would still buy from a bankrupt GM that still means that revenue would drop 30% for GM while it was in chapter 11 and that would mean liquidation.

    Those who advocate chap 11 better be 100% sure that it would work because if it didn’t you would end up in chapter 7 and the costs to the country as the supplier base went under would be enormous. We would be looking at another depression.

  60. ps

    All this fear-mongering over propping up a business with a $60B negative net worth is scary. GM has clearly failed, the balance of the US auto industry is viable if properly managed. P***ing away at least $60B into GM does not help our economy or the US auto industry.

  61. artichoke

    Reduction in the cost of auto manufacture is coming regardless. China is ramping up. It will be a success like every other thing they have done in the past 15 years.

    Soon you will be able to buy a good Chinese car for real cheap.

    Propping up the current cost structure would be madness, because even the new lower cost structure will probably be too high.

  62. jm

    jeff65,

    It really doesn’t matter what securities the Japanese government bought with those dollars — AFAIK, they bought Treasuries, but money is fungible — what matters is that they bought securities (lending the money to us) rather than US goods and services (making Americans work to produce and send them things of value).

    It’s interesting that just after I wrote my comment, I began reading the latest Bungei Shunju, finding in it the two long articles on the financial crisis, one containing an interview with a Japanese commentator who vociferously criticizes the exchange-rate manipulation policies I mentioned, referring to the resulting US consumption binge as “the cheap-yen bubble”.

  63. Victor

    Lots of people would like to buy cars. But few can afford them anymore. Not necessarily because the credit lines have dried up. I’m still seeing the usual TV ads for “no money down” deals. The real reason is that people just aren’t making enough money anymore, they can’t afford big ticket items and are deathly afraid of incurring yet more debt, over and above the mountains of debt they already have.

    So the real problem is not that the “big three” are “in trouble,” but that their market has evaporated. So what would be the point of either “bailing them out” with a 25 billion dollar loan OR encouraging them to go the bankruptcy route? Either way, there’s no longer any future for the US auto industry.

    What should be done? Well, first of all a single payer, “socialized medicine” style national health care system should be adopted. And while you’re at it, Mr. Obama, how about turning Social Security into a progressive tax on all levels of income, so the US can afford a meaningful social safety net? With these two programs in place, the worst effects of the industry’s collapse can be avoided.

    Then, nationalize the auto industry and put the same workers to work on building vehicles that ARE needed, such as modern, high speed railroad trains, buses, subways, and yes, more efficient (and far less expensive) autos.

    IMO there is no alternative to the nationalization of a great many businesses that are now deemed “to big to fail.” Let them fail, take them over and place them in the service of the general good.

  64. Anonymous

    mmdonner asked:

    why was it so easy for everyone to accept, nearly without protect or voice in media, aig’s bailout yet GM gets total flack?
    what is the underlying mentality here and why?

    I’d say ‘the underlying mentality’ would be that of rentier capital and the culture which it has helped produce over the last roughly three decades. It may help to think in terms of productive and unproductive, consider which has become dominant over these decades and how this dominance is at the same time a dependency.

    Long ago GM ceased to be a purely industrial enterprise yet nevertheless is value adding while AIG is not.

    Who should manage the company? The employees (which is not the UAW).

  65. J. Lo

    http://www.detnews.com/apps/pbcs.dll/article?AID=/20081121/AUTO01/811210428/1001/BIZ

    “Detroit’s Big Three CEOs came under heavy fire for flying to Washington in private corporate jets to testify before Congress. GM chairman and CEO Rick Wagoner and Ford president and CEO Alan Mulally rejected a suggestion they take a $1-a-year salary, while Chrysler chairman and CEO Robert Nardelli said he would do so if the company received loans.”

    Wagoner and Mulally can burn in hell. The boards should fire these guys and fill them with whoever will take the deal. Worse comes to worse, the new CEOs will run their companies into the ground. But at least they’ll get their second shot with a loan. These guys are determined to cut their own throats. I’d give a shot to Nardelli’s company over any of the others.

  66. baychev

    people are buying about 15% less vehicles this year relative to the last one. even toyota’s sales are down 30% yoy for the past couple of months. but they do not whine.

    pay is a big problem. it is not only the union, but all levels of management that allow pay for nothing to be an ongoing practice.

    design, innovation are other major issues. this management has stiffled any decent designer and i doubt anyone goes to work with desire.

    despite all that, people will be buying cars and someone has to produce them. it only seems the present business model is not functioning. needless to say that F/GM are producing and selling desirable cars in germany with unionized work and much higher taxation. the only difference is the ‘culture’ of all levels of management.

    why not do the following: split the US from the other operations and bankrupt the US ones. import the cars from germany (where workers were put on 3-4 days work weeks) for the time being as they are produced at profit. in the meantime find venture partners (even the government if it wants to save all those jobs) that want to copycat the european business model.

  67. Jim

    One more point – Most are blaming GM’s management and/or labor for the failure. That’s fine, but the truth is that innovation rarely comes from the largest companies in mature industries.

    IMO, there are cultural/organizational reasons why this is so, and countless examples to back it up:
    IBM – upset by digital, Wang, DG
    mini-computers – upset by workstations (Sun, etc)
    Microsoft – upset by Google, Apple
    Telco’s – upset by VOIP

    My point is that this dinosaur industry is at the cusp of a major upset and it’s highly unlikely that these old buggy-whip manufacturers will be standing after the change.

    This means that the only constructive use for government money is to help provide a safety net to minimize the social costs of the implosion. Also, government could perhaps help push the innovation phase at the margins by removing externalities (eg higher gas taxes, pollution controls, etc). But even this smaller intervention is fraught with risks of misallocation.

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