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Is a GM Bankruptcy Inevitable?

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Markets in Asia are staging a peppy rebound rally on the assumption that US rescue of the Big Three is in the cards.

No one seems to be taking seriously the possibility that bankruptcy is inevitable for GM and perhaps Chrysler. And were that to take place, opinion is sorely divided as to what that might mean for the industry and economy.

The US papers, even though they indicate that a rescue is moving forward, are also making clear that this process has multiple constraints. The first is the the Administration seems reluctant to run roughshod over the Senate Republicans, and seems disposed to impose tough conditions on the automakers. But can they? As a Wall Street Journal story notes in passing:

The Bush administration must also figure out whether, and how, to try to wring concessions from affected parties, including factory workers, dealers and holders of the companies’ debt. Without such concessions, the companies are likely to need cash infusions long into the future, congressional critics say.

The Bush administration can try to demand concessions upfront as a condition for making initial rescue loans. But it is unlikely Treasury can extract concessions from all the affected parties as part of a loan deal.

The Financial Times also described the Senate Republican’s desire to extract a pound of flesh:

President George W. Bush was on Sunday facing growing pressure from his own party to impose wage cuts and debt write-downs on the US’s troubled auto industry as conditions of the $14bn-$15bn emergency loan Detroit says it needs.

Republicans have stepped up their calls for Mr Bush to go far beyond legislation that failed in Congress last week and set tough demands on General Motors and Chrysler for lower labour costs and a debt/equity exchange….

In contrast with recent financial interventions, which have sometimes been pulled together over a weekend, the Treasury is proceeding deliberately over the conditions of the loan.

Another issue that has been raised is that the funds remaining under the first TARP installment are only $15 billionish, and it is possible that the Administration may decide to offer a bigger loan (sizes under consideration supposedly range from $10 to $40 billion). That strikes me as a red herring. The Wall Street Journal reported last week that $89 billion of the $250 billion TARP funds had not been allocated, and even though some applications were still in process, they were almost certain not to use all of the remaining funds before Obama takes charge. It’s a pretty safe guess at least $20 billion could be raided from that kitty, providing more than enough to get through January, perhaps even through the end of March.

But how will a deal get done? Although senators and the media like to beat up on the UAW, the bondholders are at least as big a problem. Felix Salmon noted that many GMAC bondholders were refusing to take a modest haircut in a swap that would have enabled GMAC to become a bank holding company and added this in a later post:

….there’s a large contingent of GM bondholders who don’t mark to market and therefore won’t jump at any opportunity to get, say, 50 cents on the dollar for their paper. They want what they’re owed, and the easiest legal way of preventing them from getting it is bankruptcy.

Yes, there can be a tender offer with things called “exit consents” which make it harder for holdouts to sue for the money they’re owed. But the results of the GMAC tender offer would seem to imply that getting a critical mass of bondholders to agree to those exit consents would be tough. And in any case such an offer wouldn’t extinguish the holdouts’ debt, and those holdouts would certainly be a noisy thorn in GM’s side for many years to come.

GM doesn’t have a group of bank lenders it can get round a table and negotiate with: it has a bunch of very angry bondholders who do not, under any circumstances, want to take any haircut at all.

So Paulson is left with unattractive choices, He cannot force either the bondholders or the unions to make concessions ex a bankruptcy. The bondholders and UAW know that they pretty much will be funded (do Bush and Paulson want to be associated with the wealth destruction of a disorderly bankruptcy?) and if they get a deal that tides them over until the regime change in January, the deal they get then is likely to be less punitive.

That would seem to suggest that the implicit consensus, that the automakers will soldier on, with some requirement to streamline operations and UAM concessions, will in fact take place. But what if the bondholders or UAW refuse to accept the cuts demanded by the Democrats? The Deal argues an even more aggressive, but entirely plausible, version of this viewpoint (hat tip reader Hubert). And before you reject it out of hand, note that the Journal and other financial papers are now mentioning bankruptcy as the only way to cut the Gordian knot of irreconcilable demands:

Here’s the reality: Bailout or not, GM will file for bankruptcy. There’s no escaping it. To drastically reinvent the 101-year-old company to keep it alive and return it to prosperity will require tools only available in a bankruptcy process. All the talk about no one buying cars from a bankrupt company will evaporate as everyone realizes consumers aren’t buying GM vehicles, anyway. There will be a car czar, but it won’t matter. Congress will fulminate, but it won’t matter. GM will have to file, Wagoner will be fired, a new CEO hired….

….we offer a speculative look at how the GM bankruptcy scenario will unfold.

By its own admission, GM is suffering from “the worst economic downturn, and worst credit market conditions since the Great Depression.” The company has negative net worth of nearly $60 billion and massive losses since 2005 — $21.3 billion in net losses in just the first nine months of 2008. Even worse, GM is a relic, making as many as 14 million vehicles a year, hemmed in by collective bargaining agreements, lifetime employment contracts, too many dealerships and brands.

Despite the unions’ political clout and fears that GM’s image will be fatally wounded, the federal government finally makes bankruptcy a condition for further help. Only bankruptcy can impose the discipline necessary to remake GM. “It’s the rule of law instead of the rule of politics,” says John Jerome of law firm Saul Ewing LLP. “The judge … operates in a nice confined box with a set bunch of rules and laws.”

After the short-term bailout fails, GM files for bankruptcy, ousts Wagoner and receives a $25 billion debtor-in-possession financing provided by the federal government either directly or out of the Treasury’s Troubled Assets Relief Program, or TARP. The company make its Chapter 11 filing in the U.S. Bankruptcy Court for the Eastern District of Michigan in Detroit. It’s neither prepackaged nor, for that matter, significantly prenegotiated. Congress has been throwing the prenegotiated concept around, but in reality, because of GM’s size, only a partial prenegotiated filing is practical.

Why no prepack? GM simply lacks the time to prepare a prepack, where a company works with lenders, creditors and shareholders to craft a reorganization plan and then solicits votes, all before entering bankruptcy. A prepack would require a “bajillion” creditors to buy in, says veteran auto industry attorney Jean Robertson of Calfee, Halter & Griswold LLP, an inordinately lengthy process when GM is burning through roughly $1 billion in cash a month.

The article is very much worth reading and works through its scenario in instructive detail.

What concerns me is the ease with which legislators, economists, and deal mavens cheerily brush aside how customers might react. They forget the first rule of business: you have a business ONLY if you have customers.

Now with auto sales plunging regardless, it is hard to parse out the impact of BK worries (they are overshadowed by economic contraction and scarcity of financing, plus bankruptcy talk became acute only recently). And I strongly suspect that very few of the people volunteering an opinion on how consumers will react actually own a US car.

Surveys suggest as many as 80% of customers would NOT buy a car from a company that had filed for bankruptcy (the handful GM car owners I have asked have said to a person they would not buy a car from a company that had filed for bankruptcy). And frankly, why should they? The world is lousy with cars, and there is nothing unique about the Big Three offerings. It is common sense that consumers would be likely to steer clear. Even if the company makes it, your dealership might not (The Deal envisions that at least a quarter were due to be cut; this could be accelerated and/or go further), and then where do you go for servicing?

So let’s play out my variant of how a bankruptcy goes. The three ring circus described in The Deal moves forward. The story anticipates the bankruptcy process lasts till late 2010. I tell you what happens in the meantime: there are just about zero car sales. No normal prospective car buyer is going to have any confidence with a process this protracted and uncertain and will take his business elsewhere. GM runs through its DIP money faster because neither it nor any of its dependents are getting any dough, The assumptions going in, made with unduly optimistic assumptions about sales (no allowance for customer revulsion) are way way off base.

But now that GM is in Chapter 11, there is no turning back. Its cash hemorrhaging has grown far beyond what was ever envisaged even in supposed worst case forecasts. The only options now are nationalization (to what end? The brand has been destroyed) or liquidation. And liquidation takes down the parts suppliers, which in turn makes most of the foreign transplants unworkable.

So for the hatred of UAW and the stubbornness of some GM creditors we destroy the entire US auto sector.

Having said that, I am not sure there is any happy ending here. Obama does not have the appetite that FDR did for pushing the envelope legally. You need a cramdown of bondholders, dealers, and (to a lesser degree than widely thought, labor is an issue but not to the extent depicted) the UAW, and no one seems to have a solution other than bankruptcy (maybe this is Dick Fuld’s real chance for rehabilitation. Lock the bondholders up with him and have him tell them he’ll eat their hearts unless they concede).

As I said earlier, insufficient attention is being paid to consumer reaction to a protracted bankruptcy process, which per the Deal this, is certain to be. If you lose consumers, you lose the automakers, pure and simple

I think it is a no brainer that a year plus bankruptcy process will kill sales. But this is the core issue, and should not be left to speculation. It isn’t hard to gin up focus groups and surveys (better yet, conjoint analyses, they tease out how customers trade off product attributes better than simple questions). This question, which is not hard to pin down, is instead being left to guesswork and personal prejudice. So in the end, we will have only ourselves to blame if this turns out as badly as I fear.

Perhaps the best assessment comes, from all places, the movie Elizabeth, on the early years of the reign of Elizabeth I. When her advisers are egging her to take on Spain, she mutters darkly, “I do not like wars. They have uncertain outcomes.” As we learned from Lehman, the same can be said for bankruptcy.

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48 comments

  1. Anonymous

    I think so

    I read they have 65B in liabilities and 25B in assets

    Pretty deep in the hole and taxpayers cant keep them afloat long while they burn money at the rate they are.

    UAW will be broken, wages will fall, plants will close, and massive layoffs will be had just to survive WITH taxpayer help

  2. Scott

    Question – Wouldn’t japan be better off if GM failed?

    That would reduce the overcapacity and help the japanese auto cos make it through this downturn.

    Any thoughts?

  3. Anonymous

    The transplant Japanese and German car factories will take a huge hit from the loss of the supplier network. Bankruptcy = It’s OVER.

  4. Hank Paulson's Mom

    The problem is the extreme excess in auto manufacturing, marketing, and sales (overcapacity) vs. what world consumers want/need/can afford.

    When borrowed money was being shoved down consumers throats, the “demand” for automobiles, like with housing, was much greater than it would have been had people actually been expected to make good on their loans. Like with housing, games were played with auto financing, so that people with marginal credit could keep rolling over their underwater auto loans, so that they could “afford” a new vehicle every two years:

    LA Times
    Sunday, December 30, 2007
    “New cars that are fully loaded – with debt”
    http://articles.latimes.com/2007/dec/30/business/fi-autoloans30

    ” When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn’t have to put a penny down.

    The dealership, near the Posts’ home in Victorville, made it easy; it just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.

    The Posts were a little worried about taking on such a long obligation, but they couldn’t pass up a monthly payment under $700. Now they’re having regrets.

    “I didn’t realize how much debt was in it,” said Jennifer Post, who has since moved with her family to Iowa. Now, she’d like to get rid of the truck but can’t, because there’s so much debt that she’d literally have to pay someone to take it off her hands.

    “We have no options,” she said.

    In the 1970s and ’80s, car loans hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.

    One key was interest rates, which fell from a high of 17.8% in the early 1980s to lower than 5% today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have steadily gotten more affordable – as compared to median family income – since the late 1990s.

    With cheap money at hand for more-affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.

    At the same time they were extending loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments.

    Today, most lenders offer financing on 100% or even 125% of the sticker price, and some offer the most credit-worthy buyers loans for twice the value of the vehicle they’re purchasing. Last year, the average amount financed for new cars reached 99%, according to the Consumer Bankers Assn., up from 95% in 2005…”

    People neither need, nor can afford all the automobiles the world’s automakers want to/need to sell us. The only way we were able to do so “well” in the past “Goldilocks Economy” years was by selling people cars that they couldn’t afford. As with housing, that Ponzi scheme couldn’t go on forever. Now you have the inevitable contraction, as consumers actually have to be able to afford a car (and show that they are good credit risks), rather than selling a car to anyone who wants one.
    – Hank Paulson’s Mom

  5. Hank Paulson's Mom

    The problem is the extreme excess in auto manufacturing, marketing, and sales (overcapacity) vs. what world consumers want/need/can afford.

    When borrowed money was being shoved down consumers throats, the “demand” for automobiles, like with housing, was much greater than it would have been had people actually been expected to make good on their loans. Like with housing, games were played with auto financing, so that people with marginal credit could keep rolling over their underwater auto loans, so that they could “afford” a new vehicle every two years:

    LA Times
    Sunday, December 30, 2007
    “New cars that are fully loaded – with debt”
    http://articles.latimes.com/2007/dec/30/business/fi-autoloans30

    ” When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn’t have to put a penny down.

    The dealership, near the Posts’ home in Victorville, made it easy; it just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.

    The Posts were a little worried about taking on such a long obligation, but they couldn’t pass up a monthly payment under $700. Now they’re having regrets.

    “I didn’t realize how much debt was in it,” said Jennifer Post, who has since moved with her family to Iowa. Now, she’d like to get rid of the truck but can’t, because there’s so much debt that she’d literally have to pay someone to take it off her hands.

    “We have no options,” she said.

    In the 1970s and ’80s, car loans hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.

    One key was interest rates, which fell from a high of 17.8% in the early 1980s to lower than 5% today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have steadily gotten more affordable – as compared to median family income – since the late 1990s.

    With cheap money at hand for more-affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.

    At the same time they were extending loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments.

    Today, most lenders offer financing on 100% or even 125% of the sticker price, and some offer the most credit-worthy buyers loans for twice the value of the vehicle they’re purchasing. Last year, the average amount financed for new cars reached 99%, according to the Consumer Bankers Assn., up from 95% in 2005…”

    People neither need, nor can afford all the automobiles the world’s automakers want to/need to sell us. The only way we were able to do so “well” in the past “Goldilocks Economy” years was by selling people cars that they couldn’t afford. As with housing, that Ponzi scheme couldn’t go on forever. Now you have the inevitable contraction, as consumers actually have to be able to afford a car (and show that they are good credit risks), rather than selling a car to anyone who wants one.
    – Hank Paulson’s Mom

  6. Tom Lindmark

    We seem to have moved from a crisis of the Big Three to a crisis of one manufacturer-GM. Ford has pretty much indicated it doesn’t need help and indeed may be licking its chops. Chrysler is owned by a very rich private equity fund and unless they are willing to step us first probably don’t deserve tax payer assistance and GMAC which you include in your analysis is also owned by that same private equity firm and has not been a subject of any of the bailout discussions.

    Yes, a chapter proceeding could have adverse consequences for GM but they might not be as bad as you intimate. It would be protracted and the industry would surely have time to shore up the suppliers as that would be in everyone’s best interest. GM may lose customers or they may not if the federal government provided credible warranty protection. To say anymore is pure speculation.

    If indeed GM did not survive would that indeed be so bad? The entire industry suffers from a world wide issue of over capacity. Sooner or later one or more major manufacturers is going to have to disappear in some manner. A bailout probably just postpones the inevitable.

    Finally, capitalism like bankruptcy is fraught with uncertainty. That’s the way it works. A chapter proceeding for GM would take time and over time the negative impacts will be largely muted.

  7. Andrew Bissell

    Are we any more certain of the long-term consequences of propping up failing industries, at public expense, than we are of allowing them to go into bankruptcy? This is just the classic problem of the “seen vs unseen” in economics: if GM goes bankrupt there will be very visible and painful ramifications and job losses. OTOH, if they are bailed out, the resulting failure to redirect capital to more sustainable industries will be quite hidden, and would manifest itself as a loss of American competitiveness and a long-term stagnation that would be blamed on any number of other causes. “Malaise,” and the like.

  8. PeakVT

    No one seems to be taking seriously the possibility that bankruptcy is inevitable for GM and perhaps Chrysler.

    People are, just not people who write for major coastal papers. In the long run Chrysler is dead.

    As I said earlier, insufficient attention is being paid to consumer reaction to a protracted bankruptcy process

    Wagoner has stated this explicitly, though for obvious reasons his opinion has been dismissed.

    Obama does not have the appetite that FDR did for pushing the envelope legally. You need a cramdown of bondholders, dealers, and (to a lesser degree than widely thought, labor is an issue but not to the extent depicted) the UAW, and no one seems to have a solution other than bankruptcy.

    If America had a tradition of some amount of explicit industrial policy, Obama and the new administration would be able to badger the stakeholders into some kind of deal. But that background isn’t there, so we are really stuck. This post over at Dealbook (http://dealbook.blogs.nytimes.com/2008/11/26/another-view-how-to-save-the-us-auto-industry/) suggests an industry-specific bankruptcy law. I think it’s the only way a BK could work.

  9. Yves Smith

    Gang, the problem is not the need for downsizing, everyone agrees, but the fact that a protracted bankruptcy, which is inevitable given the scale/complexity of GM’s operations, looks to be the worst of bad choices. Most observers would also grant that for GM to go into liquidation would be a disaster.

    PeakVT’s point is a good one. We don’t have a tradition of government knocking heads of industry ir market participants, indeed, the ideology is to be cowed by them. There probably COULD be some sort of creative legislative solution to the cramdown problem (how to do it outside bankruptcy, GM is in such bad shape that it ought to survive a “takings” challenge), but there isn’t a widespread recognition that one is needed.

  10. Anonymous

    The write up by The deal is good, but some of the assumptions way off base. 3 Models for GM?

    How did it escape my attention that Cerberus is sitting at this table twice, did not realize that they were in on GMAC too.

    Another point on foreign automakers, as soon as this passes, they are going to be cutting capacity like crazy here, they can’t get away with it at home, especially in Europe, much cheaper here to fire a bunch of non-union labor in the south.

    The senator from South Carloina who was bragging about how good BWM is doing in his state should be the one who has to break it to the american public that even if they don’t bail them out, they still have to pay for the DIP. He should also come back and give us regular progress reports on just how well BWM is doing in South Carolina.

    Interesting that all of the sudden it is assumed that the feds will just step into DIP too. Will they even really? Would it just be cheaper to pretend? Where does the expertise come from? I can imagine that talent is going to be at a premium with all of these guys sitting around a table, representing people who really need the money.

    How tough would the feds be in DIP? What is the precedent?

    I agree with all you have said yves. I really can’t imagine them doing much business, even with 10 billion for warranties. How do you value a warranty for a car that is no longer made?

  11. Richard Kline

    WSJ: “Only bankruptcy can impose the discipline necessary to remake GM.” The reason that the _WSJ_ is advocating bankruptcy is that this is the only way they can break the union contracts. Period. And they want this done on the hurry-up because a Democratic Admin is likely to do what it can to save jobs _on the line and on the floor_, not necessarily jobs on the 17th floor, mind you. Furthermore and in principle (I would say in fantasy, but), a bankruptcy might work better for bondholders than a workout. If GM goes BK, then the bondholders own what’s left, which they may be able to repackage for more than their share of ($25m-costs)/$65m. But again, for bondholders to remake the pieces and profit, they MUST break the union contracts, fire half the workforce, and oh by the way dump all the decades of underfunded pensions on the Federal Guvmint.

    In a phrase, the WSJ’s picture of the world is a crock of shyte.

    Now I do totally agree with three points expressed in comments above. 1) Nobody really wants any car made by GM except a Cadillac and their light trucks. 2) Chrysler is in a _much_ worse position in the market, and actually has poorer long-term prospects. 3) Overcapacity [and undercompetitiveness] in the autoindustry worldwide is a crushing burden. The products of the Big 3 weren’t competive on the whole for, oh, twenty years—but have continued to be moved in the marketplace by the wonders of financial engineering. So we have seen no product reform of the automakers because they could turn to the financial markets to ‘liquidate’ their output, i.e. sell it for no money down. Really, financial engineering and outsourcing most supply components (to shed union jobs) have been the only things keeping the Big 3 whole for decades. The first solution for the automakers is to pink slip the entirety of their upper management because that crew has been _incapable_ for a very long time of designing a product that the autobuying public wants and needs. Any public intervention should start by telling the bondholders cum inheritors what they _will and will not_ be allowed and expected to do. As we see, any Congress with a significant share of Republicans is constitutionally incapable of articulating any such directive, so the mid-term outlook is ‘crack-up.’

    We have needed an industrial policy in the US for years. And no, Obama doesn’t come into office with anything like the spine or cojones to pursue anything like that. Which guarantees that any intervention pursued by he and his will be costly failures. That doesn’t mean that we shouldn’t have intervention; we should. But we will spend much money and do everything wrong before we do anything right, here, in my view.

    America, the Can’t Do nation.

  12. Francois

    The stupidity and narrowmindedness of the Republiscums seem to know no limit. BK touted as the “best option”, solely to break the unions, (and cut important electoral support for the Democrats) with total disregard to what would happen to the whole supply chain, thus the whole US auto industry.

    And let’s not talk about the mainstream media and their covering of the whole saga. Total failure.

    The amazing thing is that people still voted for them.

  13. bg

    “I think it is a no brainer that a year plus bankruptcy process will kill sales”

    This is way too glib. After having flown with BK airlines, I can tell you that BK does not have the stigma to scare away customers.

    As for your focus groups, it is a fine idea, but the only issue being presented is servicing. The auto companies don’t service vehicles, they only write contracts. The government could do that as easily as they could do DIP financing.

    I have owned a few American vehicles. If you like big vehicles, they are pretty reasonable. Total vehicle sales have plummetted – across all brands. Capacity needs to shrink, and BK will help them do that and stay viable.

    UAW loathing is legitimate. Perhaps the UAW is not at the core of the current problem, but the US growth over the last 30 years has been 100% outside of the union sphere. Union influence has led to institutional mediocrity.

  14. Anonymous

    bg,

    So who is being glib here? I have seen the press reports citing studies that say 80% of car buyers would be reluctant to buy a car from a company that had filed for bankruptcy, I gather Yves has seen the same, and tried chatting up US car owners to the extent she could.

    You go only on your personal predisposition, have no data to support your view, and further assume not only a DIP (has a single official even mentioned the idea?) but also government providing servicing!

    You choose to assume all buyers are like you and the government will handle all the elements needed to make this work correctly, and on a timely basis. Seems pretty presumptuous to me.

  15. Independent Accountant

    YS:
    It amazes me that Washington wants to break the UAW, but did not tell Wall Street, “nobody working for a firm that got Federal money makes over $750,000 a year. Your $25 million a year traders don’t like it, let them leave”.
    Since we have no law in the US anyway, why not do a “prepak” like this: Incorporate “Chevrolet-Cadillac-GMC Truck”. Let CCGMC hire “new” employees, some of whom may be current UAW members. CCGMC goes on with GM as its sole stockholder and is auctioned off by the bankruptcy judge. Some creditors may scream. So? The only creditors which might be worse off are any holding mortgages on CCGMC’s assets. Maybe. Such an entity should be able to sell cars. In effect this creates a General Portland Electric or Houston Natural Gas out of Enron. GM will dump much of its pension liabilities on Uncle Sam anyway through the PBGC. With its current retiree health care expenses and pension liabilities, GM will go bankrupt sooner or later. Even the UAW knows this.

  16. bg

    Anon 3:01 am

    You are saying it is glib to question anothers opinion? I think this board is above that.

    A single study and gathering opinions from NYC friends does not rise to the level of factual.

    I did cite data: airline BK’s. As for your dismissal of government DIP, Stiglitz supports it here

    A lot of the anti-BK argument lies of that it will crush the auto industry. It may be true, but it data that is being propagated by non-disinterested set of parties.

    And in my mind it is the only defensible remaining argument against BK.

  17. Anonymous

    bg, this is 3:01,

    Airline BKs are not REMOTELY comparable. It is a transaction, not a long-term commitment, On many routes, the choices are limited. There is no issue even remotely akin to resale value and servicing. A spurious argument. No auto company has yet to go into bankruptcy and emerge successfully. If such a case example existed, it would be relevant, but there is none.

    Do you have another study on auto buyers attitudes to cite? If not, all you have is your personal prejudice.

    Stiglitz is not in any policy making role in the new Administration. You have yet to provide proof that any Administration official is on the case re DIP. Noise in the financial media does not mean official interest.

  18. dearieme

    “..GM is … hemmed in by collective bargaining agreements, lifetime employment contracts..”: if they’re going to run a company in imitation of France, perhaps they should have hired Frenchmen.

  19. Yves Smith

    bg,

    The people I polled are not “NYC friends.” Not a single one is even in the Northeast. They are in the South, Midwest. and California.

  20. rahuldeodhar

    I think before the government agrees to bailout – it should give a reform packgage spelling out the reforms GM / Ford and even the banks (those that get govt money).

    So it should be a give and take. So all the airplanes and lux hotel expenses are banned and Wagoner should be taking a bicycle to office till the funds are paid off and even thereafter.

    US bailout is looking like a farce. The government gives money for equity capital, working cap (through forced bank lending), consumer credit (helicopter drops to “stimulate” spending continues) and hopes that this process will generate excesses to pay of its borrowers – i.e China

    Looks like a scam to me!

    The “stimulus” word is really really disgusting in the current context. If only US/global voter could understand how disgusting it really is.

  21. fresno dan

    I don’t think enough people are talking about the dealerships, and the tremendous financial burden GM carries by having so many dealerships. The dealerships have political sway in their own states, and have heavily influenced the laws that govern the Auto dealship relationships. I can understand someone who has sunk 50 million in a dealership battling against any changes – these people are wealthy, but they could be effectively wiped out.

  22. Anonymous

    I’ll bet that anyone who wouldn’t buy a car because of a bankruptcy also will not buy a car from a company that is so insolvent bankruptcy will continue to be a prospect.

    Actual bankruptcy is not a real consumer factor.

  23. melpol

    Phone calls to Washington are running as high as 50 to one against the bailout of the auto industry. Taxpayers do not want to support auto workers and their broken down industry when they need to support their own family at home.The ordinary worker is being taxed twice by also paying for the bailout. But Washington does not care about the little guy and his high taxation only about the big boys in the auto industry. How can the big three expect to sell their cars to angry taxpayers that have been burned twice?

  24. Anonymous

    I am not sure I agree that they will not be bailed out and with almost no conditions by the incoming administration. The problem is that with bankruptcy or even appointing a car czar you create a credit event which could severely damage a number of banks. Credit default swaps for GM far exceed anything that Lehman had.

    The treasury does not have a lot of choices. Either than can bail the automakers in such a way as not to trigger a credit event or they will need to pump lots more money into the banks and pump more stimulus money through as a result of the failure.

    It will be a waste of money because looking at the example of Rover in the UK even the slightest rumour of bankruptcy was enough for the consumer to stop buying the cars. It is not the warranties the consumers worried about but the long term availability of spare parts.

    The problem is that this kind of targeted bailout creates perverse incentives, and deep feelings of unfairness. Targeting the whole industry including foreign auto makers should have been an option on the table. Now we can probably expect Ford and others to be a touch upset when GM and Chrysler receive over generous terms.

    I know of one global company based out of Europe which has two major US competitors. It is struggling but has cash and is increasing market share significantly (25percent). One of its competitors will have to be restructured in light of recent losses and the other is frankly no longer solvent but is managing to wage a price war using money gained from a roundabout route from the Treasury. It is interesting to see how the differences in business models between the US who concentrate on low price and efficiency and others who concentrate more of service to the customer and supplier, fair during a downturn. Having a price war off course is all well a good but you still need to pay your suppliers and extend credit to your customers and that’s why in all probability the US Tax payer will likely be footing a large bill in this case.

    It will not be fair but I expect GM and Chrysler to get the money to keep going into next year. This will cause severe damage to the concept of democracy in the US as it becomes clear that government is acting without mandate from the electorate and is riding roughshod over guiding rules of government.

  25. K T Cat

    I love all this confidence in the government on display on this blog, all from people who probably have never worked in it. If you think the UAW contract is larded up with ridiculous clauses, contradictory work rules and payoffs to people who don’t work, take a look at government rules.

    Everyone talks as if the government had access to an endless supply of wise experts who can operate with freedom to guide the car companies back to solvency. It’s just not true. Stop by your local DMV and ask yourself how many people working there do you want helping guide GM through bankruptcy.

    In the end, people and companies have to make things work on their own. There is no government money fairy who can come in and wave a magic wand and make it all work again. (See also: California, impeding default of.)

    All the money being thrown around to save this company or that comes from someone who is working and producing things of value. Just how much more do you plan on loading them up with dead weight to carry?

  26. Anonymous

    Having watched the decline and eventual destruction of the UK motor industry over a number of years the following comments might be useful;

    1. Our motor industry died because the government tried to rescue old established car makers with poor quality products rather than concentrate on those product lines and manufacturing / design groups which actually had a future.

    2. Those quality sectors (.g. Land Rover, Jaguar) that had a chance did survive – just – in the hands of foreign owners but the overall picture is one of wholesale destruction of manufacturing and employment together with the construction – in new, previously non-motor related areas of the country – of foreign owned plants. This avoided the problems of large scale unionisation associated with those more established motor manufacturing areas.

    3. All of the above happened despite the ministrations of socialist governments all too happy to nationalise or support failing employers.

    The final analysis is simple – if you have a rebellious labour force, poor products out of line with upcoming market drivers (increasing fuel cost going forward for example), incredibly efficient high quality foreign competition, and a massive black hole in your balance sheet you had better file for bankrupcy and persuade someone to buy out the good bits – letting the rest sink.

    Lower costs all round and the same result in the end.

  27. patrick neid

    “Car Czar”

    It boggles the mind.

    So many hobgoblins, where to start? If we imagine that GM escapes Chapter 11 it still, even with woeful Congressional over-site, faces massive firings, plant closings and brand disappearance. I would think it is safe to say that half the company and plants will disappear. It might pretend that it will be building new plants in the future to replace the abandoned. The supply chain will follow suit. So basically what we have here is a company half its size costing the taxpayer at least $100 billion. I know they say only $30 billion but 3x that number is the norm. Also left in place is the UAW with all its Hydra heads.

    Chapter 11. We end up with basically the same size company as above but with no bondholders demands, stock investors and general obligations severely pared back. The losses above primarily fall on all the investor classes and workers, current and retired. Painful yes but they were all uncoerced participants. The Taxpayer is on the hook for probably the $10-$15 billion to get them to Chapter 11.

    Both scenarios have the same risk in that they may fail and GM goes bye bye. While I have left out a thousand details I think this is how many view the situation resulting in push back against the deal. I for one will always roll the dice on Chapter 11 rather than government/congressional involvement in a situation that even the best and brightest in the auto industry have never been able to resolve. We created Chapter 11 for this reason. Use it.

    As to the thoughts that buyers and the supply chain collapsing, again I think it denies the survivor capitalist instinct in American industry. They will find a way to take advantage of the situation to survive.

  28. Anonymous

    It’s not clear to me that BK kills the suppliers. The viable carmakers should be able to secure supplies for a time. First, shipping is cheap and China is hungry (and quick to retool). Second, viable carmakers can finance local suppliers, as BMW is doing in Europe. This doesn’t save the whole industry, of course, but favored sources will gain from increased concentration in the long run. You could talk me out of this, but not without numbers.

  29. tompain

    If car buyers at the time of purchase really took into consideration the financial condition of the manufacturer, they already would not be buying GM vehicles. The effect of bankruptcy on purchase behavior will be temporary and not that large. Warranty concerns can be addressed with third party insurance if necessary.

  30. Stephen

    Assets dont die they get reorganized and redeployed. If people won’t buy a vehicle from a Ch 11 company why would they have flown United when it was in Ch 11?

    I cannot see why the US government, should it choose not to, couldnt cramdown the bondholders. Worst case Government takes total control of GM then spins it out again relived of liabilities and tells the bondholders to go ahead and sue the government with all of the protection the government could build into legislation….not the least of which would be to invoke national security, claim eminent domian or some other such cover.

    If the bondholders want any money they can negotaite with the government over the INFINITE amount of time they can hold it up and never return it.

    UAW has to take a haircut. They know they are fighting a rearguard action.

    All else fails, Americans buy Fords. Being Canadian I question what is so critical about maintaining the Brand. What you lose is the design, strategy and head office jobs….the parts and assembly jobs are still there.

    As for the dealers….honestly who cares, they are the least strategic and easiest part to replace, as all of the Honda, Toyata and Huyundai dealerships show. People will show up to willing to distribute vehicles, whether they are Chevy’s, Cherry’s, Tata’s or BMW’s.

    Bonholders overfunded the wrong company, the UAW extorted promises from a company that couldnt keep them, the stockholders are already gone.

    The one point I agree with Yves on….do it quickly. I think the best answer may be the US government taking the whole enterprise in house then spinning out all the assets again the next day and then telling all the liability holders to take the deal offered because its the last one available. BTW the UAW will be given a 6 months to negotiate a new deal under government mediation.

    But that takes a strong leader….I thought you guys just elected one.

  31. charlie

    As a though experiment, I looked at GM’s November sales and tried to see what models would be worth saving (i.e. sales have not fallen off the roof this year).

    This is what I found:

    cars:

    Cadilliac CTS
    Chevy Cobalt
    Pontiac G6
    Pontiac Vibe
    Saturn Aura
    Chevy Malibu

    Trucks:

    Buick Enclave
    Chevy HHR
    GMC Acadia
    Saturn VUE

    Although they are not selling well, you have to include the Silverado/Sierra in the mix — still the best selling vehicles in the US.

    Almost all these vehicles are made in the US, except for the Vue (mexico), VIBE (made in US at the joint plant with Toyota), HHR (mexico), and Silverado (some Canadian production)

    Based on that, I see the following GM plants surviving:

    LANS GRD RIVER
    LORDSTOWN
    ORION
    Fairfax
    Numi

    Flint
    Ft. Wayne
    Lans Delta
    Pontiac

    Canada: oshwa
    Mexico:Ramos Arizpe

    Eyeballing it, it looks as we can expect GM to shut down 3/4 of their plants in the US.

    That is massive hurt to suppliers, dealers, etc.

    Remove the Pickups, and it is even worse.

  32. Tom

    The US auto industry represents the heart of our machine tool capacity and industrial manufacturing base. To permit all of these factories and all of the skilled labor to waste away would be insane. We need to do what we did in WWII — repurpose the manufacturing capacity of the auto industry. Have the federal government invest infrastructure dollars and convert much of the auto industry surplus capacity to the production of water treatment plants, bridges, locks and dams, nuclear power plants, and mass transit systems. This is the answer.

  33. HoosierDaddy

    Even if the automakers do finally get a bailout it seems likely it is going to take to mid 2009 to have all the fights again and then get the operation going. I really don’t know if GM can survive another 6 months of “automaker bailouts hang in the balance, GM and Chrysler on death’s door” news stories. I realize Americans tend not to keep up on current events but at this point you’d have to have been in isolation for the last month to not know that the big 3 are very, very sick.

    I have become resigned to the belief that this is going to end very, very badly. Either we’re going to have a bailout so filled with drawn out posturing and crazy strings that the companies are going to die like a bull in the ring, slowly and messily; or we’re going to get a BK that probably results in the companies dying like a bull in a slaughterhouse, quickly and messily.

    At this point I’m leaning toward the Samson option. The Rest of the Country has basically told the Rust Belt to go to hell. GM and Chrysler should just file ch 7 and return the favor. Why not?

  34. Anonymous

    Hoosier Daddy,

    At this point I’m leaning toward the Samson option. The Rest of the Country has basically told the Rust Belt to go to hell. GM and Chrysler should just file ch 7 and return the favor. Why not?

    This should be seriously explored by the Rust Belt (a/k/a "Flyover Country") on a far larger scale. The ultimate example is when Malaysia politically expelled Singapore from the Malaysian Federation circa 1965.

    This same example should be applied post haste to the Metropolitan New York City area and most of California. These areas have come to be dominated by no-talent parasites. These people seriously expect 7 & 8 figure salaries merely for using laser printers and their empty mouths to propagate lies and nonsense.

    The paper flipping useless eaters will try propagating scare stories about how the skies will fall and the earth will open up if they’re excluded.

    Ignore them and their lies. Instead look at the company history of Steel Dynamics of Northern Indiana (STLD). This is small example what the local plant managers and engineers can do for themselves and their employees. That is, once the Wall Street, Ivy League and politicized union barnacles are scraped off the enterprise hull.

  35. FairEconomist

    The basic solution to the PR problem of bankruptcy is not to call it a bankruptcy. Write up a “Automaker Modernization Act” which calls for the president to appoint somebody with particular qualifications which just so happen to restrict choices to bankruptcy judges and empower the person to restrict or rewrite “improper and unsustainable” contracts. Voila, bankruptcy by another name would smell as – well, probably not sweet, but a lot better than the alternatives.

    Since we have no law in the US anyway, why not do a “prepak” like this: Incorporate “Chevrolet-Cadillac-GMC Truck”. Let CCGMC hire “new” employees, some of whom may be current UAW members. CCGMC goes on with GM as its sole stockholder and is auctioned off by the bankruptcy judge.

    This is absolutely the right way to do it. Save what can be saved and throw the rest away. Although Buick also makes excellent cars (check the quality reports, all you folks still stuck in the ’80s) and the brand is valuable abroad so that should probably be saved too.

    And to the people whining about lousy US cars – GM and Ford have been ahead of many foreign makers, including Nissan and Volkswagon, for over a decade. Why don’t I ever hear people talking about crap Nissan cars? It’s the 21st century; get with it, folks.

    P.S. Part of the reason nobody talks about foreign crap cars is that absolutely nobody makes crap cars anymore, at least not for sale in the US. Even the worst manufacturers are up around 1990′s Japanese quality. Ford and GM are above average, but now that everybody is good it doesn’t make enough of a difference.

  36. FairEconomist

    In terms of branding, is there any reason for GM not to go to one everyday brand (Chevy) and one luxury brand (Cadillac) for US sales, like almost all foreign makers? Buick and Pontiac are dead as brands in the US. Saturn still has a service and sales brand, but as cars it’s dead. GMC in my mind hasn’t got much distinctiveness, although I buy cars so maybe I’m just not paying attention. Saab has a brand, but it’s such a niche it doesn’t seem worth saving.

    Toyota is doing very well with two brands – what would GM get with more?

  37. jkiss

    First, when the transplants came, they brought much of their parts suppliers with them. In addition, many of these cars have equivalent versions in japan… no doubt parts can be supplied from there as their own market slumps.
    Second, assumptions of the size of the us market are too high in a severe recession that lasts at least another year and has very slow employment recovery. Rather than 10M+ IMO it is 10M-. So parts suppliers anyway will have to cut capacity along with majors.
    Third, assuming gm goes bk, there will be an immediate shift to other brands, a move that has already started – yes, all see lower sales, but gm is worst of all, which signifies the continuance of the multi-decade loss of market share. Losses of gm parts will be made up by increased demand from others.
    IMO there will be some dislocations, but shifting away from one manufacturer with 20% of the market is not as hard as shifting from cars to tanks in WWII. At worst it might be necessary for some short term USG loans to a few critical suppliers; these loans will be paid back, unlike any made to gm.

  38. Lord

    People would be hesitant to buy from a bankrupt company due to uncertainty, but brands are traded like baseball cards between companies these days. Does anyone really think Cadillac won’t be around in the future? Bankruptcy would enhance the prospects of long term survivability by clearing away the debris. They may be down initially but would come out stronger as long as the government provided them with the necessary funds to restructure in bankruptcy.

  39. Anonymous

    What if the government were to nationalize health care or assume their pension obligations? What type of economic effect would this have on the Big 3? A lot of their debt is connected to unfunded pension and healthcare obligations. Would this help relieve the strain? Also, couldn’t this be spun as saving retirees and workers rather than saving the Big 3 (to make it more politically palatable)?

  40. Anonymous

    The pension is OVERFUNDED, dunno why the canard about the pensions has taken hold. The one biggie legacy cost is funding retiree health care, and that should have been provided for too in the good years. A failure of management is being blamed on the UAW.

  41. Jacob529

    None of the unionized big three auto companies will make it with this kind of worldwide vehicle overcapacity. Price & quality competition will overwhelm them. Forget about the arguments on wages or benefits of the UAW. ANY unionized plant has the "not my job" and "you need to negotiate if you want to change the way we put that bolt in the front fender" kind of work rules that stifle productivity and slow quality improvements. None of the big three can compete against the transplants or imports long term (past 2009-2010).

  42. sanjay

    I am not sure what the value of a survey is that asks the question “would you buy a car from a company in Bankruptcy”- I would expect that response would get very high negative rating.

    Why would a consumer buy a car from a car that was threatened with Bankruptcy? If in fact bankruptcy was relevant to a consumer decision just its possibility (particularly given the media coverage) should have the same effect as bankruptcy. Sort of like having a sign which says “beware of mines”. The existence of the mine is irrelevant.

  43. bg

    YS, Sorry if I offended by use of the word glib. I think it is fair to question data cited as fact without having alternative facts. I am unconvinced, at any rate.

    We do have somewhat of a real time experiment happening. Car sales are down across the industry. 31% at Toyota, 37% at GM. Yet all know that GM has a probability of default much higher than zero. Therefore we have some idea that the threat of BK does not drive sales to zero.

    If you are going to base your case for bailout on the non-viability of a BK car company, then this is a fair debate.

  44. Anonymous

    GM can go BK and the sun will still rise. It can reorg, clip useless brands (no one cried for Oldsmobile) so adios Buick, Pontiac, Hummer and Saturn. The model is there – look at the Japanese automakers. Honda/Acura, Toyota/Lexus, Nissan/Infinity meet Chevy/Cadillac, Ford/Lincoln (sorry Mercury). Chrysler should spin off its minivans and the Jeep brand and call it a day. It was a good run.

    The excess manufacturing capacity created by the closed plants would not go unused for long. The fed can pump dollars into brands like Tesla to get legitimate alternative fuel cars built in those plants. Sell a plant to Hyundai. Anyone notice that Putin has been visiting our neighbors recently? – Build some tanks. Sure the UAW will kick and scream, but the alternative is much worse.

    Whatever happens, the worst solution is to keep pumping gas into the tanks of a buring gas station in hopes that there will some gas left to sell once the fire is out. The fed (tres., cong., sen., et al.) should hold on to its (our) wallet until it gets a better fix on what is really happening.

  45. Anonymous

    Everyone needs to realize that government intervention; especially owning anything is one step toward Communism. I am not saying we should vote for or against any bailouts, but everyone better understand where that path ultimately leads. Read your Declaraation of Indepence and original Constitution, have you ever read them? Boil down what is the government ultimately responsible for – it was originated to protect borders and control interstate commerce, my what a long way and big budget deficit we have come to.
    FREE ENTERPRISE is the country we live in, and it rules via consumer vote. If there is $$ to be made in the automotive industry(which there is, just look at Toyota) the idea that the automotive market will topple over and we will be riding bikes is rediculus to say the least. I work for an autmotive supplier and volume will shift to companies that have improved their SYSTEMS to survive in times like these. That is what the big 3 have not done and they had a warning 34 years ago. Read the TOYOTA WAY for some history. I am PRO AMERICAN, PRO FREE MARKET, PRO NO FREE RIDE, PRO YOU GET PAID FOR WHAT YOU DO and PRO CONSUMER DEMAND RULES, the alternatives are SOCIALISM, how is that working out for those countries? A “poor” person in American lives better than the kings of antiquity; they have more choices and freedoms than every before in history. We live in the greatest country in the world and that has ever esisted because of the Free Enterprise system, you starve that and we all starve.

  46. Anonymous

    Yves
    Having read through this group of great comments (as usual) I come away with two new ideas. Or rather two new ways of looking at the problem. The both have to do with what has been called “artificially- tied variables”
    1. That the fate of the auto suppliers is tied to that of the Big3. That need not be true if the two problems are dealt with as separable issues. I personally feel that the suppliers are more important to save then GM. I am not certain but assume that at least some are also UAW

    2. The Unionization issue also has two aspects. Money is the lightening rod, but it is the social system, the culture if you will of the shop floor that is much more important. And culture if you will is THE central gut issue over which wars are fought.
    If I understand correctly Southern culture has somehow found a reception in the Asian transplants. For them the UAW (northern)culture is as alien now as it was in 1865. IIRC the UAW attempts to unionize these transplants was huge news in the South…another Northern invasion.
    And now the UAW is fighting itself to keep its culture, suggested by Jacob 529 above, alive. (As I New Yorker I would add the Javits Exhibition Center. There an exhibitor is unable to plug in a light or computer. Instead he must wait for a Union electrician to come and do it.) It seems to be economic, but I also see it as a power and self-esteem issue on the part of Labor
    As we can see from the expressions of emotions we see in the above responses, defence of one’s culture is a hugely emotional issue, immediately defended.
    Too bad we have to fight a civil war in the middle of a recession
    plschwartz

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