Obama Pushing "Quick, Surgical" Big Auto Bankruptcy Fantasy

Is Obama’s leaked view that a “quick and surgical bankruptcy” was a “likely option” for GM and Chrysler form of bizarre brinksmanship? If not, Obama has just painted himself in a corner based on what looks to be some very bad advice.

As we will explain below, the notion of a “quick and surgical” bankruptcy for GM, and probably Chrysler too, is a fantasy. GM would be the most complicated bankruptcy ever. It simply isn’t amenable to a prepack or a fast track variant. In fact, somme bankruptcy experts think a Chapter 11 restructuring simply isn’t possible and a filing would morph in the courthouse into a liquidiation. That in turn would take out many suppliers, and many of the foreign transplants too.

And before you insist that Obama has access to the best legal and economic advice, I suggest you review the record on the banking industry front and think twice. The policy moves so far have been dictated by faux constraints, such as “no more Lehmans” and “we can’t go back to Congress for more money” and “we don’t do nationalizations”. The same sort of contorted thinking that produced the public private partnership monstrosity seems to be at work here.

Update 2:00 AM. The New York Times sets forth how the Administration intends to ram a deal through, namely, by, splitting the company in two and getting “some” creditors to agree to the split. The problem with this construct, however (and BK experts welcome to opine), it appears from the long-form description of how a big complicated BK normally proceeds, that having “some” creditors agree doesn’t cut it. As we recount further down, bankruptcy experts had earlier ruled out a pre-pack as being undoable due to the impossibility of getting the needed number of parties to consent in a compressed timetable, I don’t see how having a structural proposal solves that fundamental problem.

From the Times first, then back to the earlier post:

The government may seek to ease General Motors into what it calls a “controlled” bankruptcy, somewhere between a prepackaged bankruptcy and court chaos, by persuading at least some creditors to agree to a plan that would cleave the company into two pieces, according to people briefed on the matter.

Instead of signing on every creditor as is typically required in prepackaged deals, administration officials are using as leverage the promise of taxpayer financing….

“As lawyers would say, it’s sui generis, at least in my experience,” said Joel B. Zweibel, the retired co-head of restructuring at the law firm O’Melveny & Myers…..

Under a plan being worked out by the administration, G.M. would file for prearranged bankruptcy, according to these people. It would then use a sale authorized under Section 363 of the bankruptcy code to quickly sell off the desirable assets to a new company financed by the government. These good pieces might include Cadillac and Chevrolet, as well as assets the company needs to run the business.

Less desirable assets, brands like Hummer and underperforming factories, would be left in the old company. Proceeds from the sales, including stock in the new company, would be given to the old G.M., helping to settle claims….

The administration hopes to win support from some of G.M.’s creditors, notably the United Automobile Workers, which would be forced to pare its health care benefits and whose pension obligations would probably remain in the old company. But the bankruptcy code allows a judge to approve a sale even over creditor objections in an emergency under Section 363, legal experts say. Such was the case with the Lehman sale….

History offers almost no precedent for a G.M. bankruptcy filing. Companies like Continental Airlines and the Delphi Corporation, the auto parts maker, have used the courts to transform their businesses and reduce their costs. But none matched the size and interconnectedness of G.M.

Yves again. This is very high stakes poker. If this gambit fails, the Administration will have staked its credibility on not bailing out GM and will likely feel compelled to withhold support, which will force a BK, controlled or conventional. And if you read between the lines, while none of the experts were willing to dash cold water on the idea, they signaled strong reservations:

“You’re introducing politics into the process,” said David A. Skeel, a law professor at the University of Pennsylvania.

The administration may still encounter surprises in its efforts, Mr. Skeel said.

“The hope is that if we call it a controlled bankruptcy, that’s what it will be,” he said.

The Administration had no problem lending what amounted to $250 billion to Citigroup, plus the equity infusions (if memory serves me right, $45 billion). Sure pays to be a bank.

Back to the original post.

Let us review some key sections of an article at The Deal in December on what a GM BK would look like,:

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.

According to James Wilton of Ropes & Gray LLP, who was debtor counsel to auto parts maker Holley Performance Products Inc., a complex case such as GM’s would require negotiation after filing instead of before…

Yves here. OK, got that? No pre-pack. Too many moving parts. Back to the story:

So GM prenegotiates a deal with creditors only. The company has already said in Securities and Exchange Commission filings that it has begun negotiations with lenders, bondholders and its unions to whittle its debt at year’s end by $32 billion to roughly $30 billion. It hopes to complete the process by March 31, the deadline under the tentative bailout bill for agreement on a long-term viability plan…..

Yves again, We are two months behind that timetable. Back to the article:

Downtown Detroit — at least the hotels and restaurants — rapidly fills up with all the visiting lawyers and advisers. GM isn’t going to pull an Enron Corp. and make its petition hundreds of miles away in New York (too expensive) or Delaware (the appellate court isn’t kind to the idea of abrogating collective bargaining agreements)….

The sheer size of a GM proceeding mandates that other high-profile cases not overwhelm a court. Many of GM’s suppliers are nearby, as is the United Auto Workers’ headquarters…..

Another factor: Delaware isn’t a particularly friendly place to break union contracts. “The standard for doing that in the 3rd Circuit [Delaware, New Jersey and Pennsylvania] is hard to accomplish,” says David Stratton of Pepper Hamilton LLP, debtor co-counsel for Holley.

The feds charge LIBOR plus 300 basis points on the DIP, 300 basis points below the current rate, but still capable of providing a return for taxpayers without killing GM. And by providing the DIP, taxpayers get paid before other GM creditors. Providing DIPs, says Saul Ewing’s Jerome, is “a more rational use of bailout money, less political.”….

But what about GM’s financial creditors? GM’s debt load, SEC filings show, includes a secured revolving credit facility with the full $4.4 billion drawn on it, a $1.5 billion secured term loan, three series of unsecured convertible debentures with more than $6.9 billion outstanding, about $16 billion in unsecured bonds and $19 billion in other long-term liabilities, ranging from municipal bonds and capital leases to contingent convertible debt and foreign currency-denominated bonds. Then, of course, there are GM’s bailout funds. It’s unlikely that all those debtholders will reach agreement, even after substantial talks.

Thus the seeds of dissension among creditors will have already been sown, and the chances of even a prenegotiated deal exploding are high, Calfee Halter’s Robertson says. “I would hope that the creditors would work together, because they have everything to lose,” she says.

Barnes & Thornburg’s Thorne is more hopeful. “Even if all the ‘I’s weren’t dotted and the ‘T’s weren’t crossed [before the filing], constituencies would come together,” she says. “There will be fights over money, but creditors will be working together because if they can’t and production stops, the costs are monumental.”

Nearly every constituency, of course, wants its own official committee in order to have its professional expenses paid out of the GM estate. As in almost every bankruptcy, an official committee of unsecured creditors is appointed. But U.S. Trustee Daniel M. McDermott, who oversees bankruptcies in Michigan and Ohio, wants to keep committees to a minimum. (The judge in the case has some say here, too.) McDermott must decide whether GM retirees and bondholders get official committees. Ditto for car dealers. Those without official status assemble informal panels. GM shareholders try to get an equity committee, and they’re laughed out of court….

While this jockeying is going on, Cooper [the presumed new CEO] turns his attention to his biggest task: reshaping GM’s operations. He will have to downsize the company, cutting brands, dealers, workers. The only thing to increase will be mobs of unhappy people. Cooper decides to retain Cadillac as GM’s luxury brand, Chevrolet as its core and GMC as its truck line. Everything else has to be unloaded through Section 363 sales.

GM will become more like Nissan, Toyota Motor Corp. and Honda Motor Co. Ltd. Gone are Buick, Pontiac, Hummer, Saab and Saturn. For GM, it serves as more than a catharsis. There is now much less duplication, less overhead and more cash from sales to pump back into the business. Some discarded brands don’t sell quickly (Hummer), while others will (Buick operations in China, where the nameplate is very popular). Overall, GM must sell millions of fewer cars a year to become profitable again. “The fundamental change [for GM] is that it’s going to have to not be all things to all people and create all these niche cars for niche markets,” says the restructuring adviser, adding that GM has to realize that being a carmaker is simply not about grabbing the biggest market share. “It’s better to say, ‘Lets find products to build profitably.’ “

But before GM can begin 363 sales, it must deal with labor and dealers, says Conway MacKenzie & Dunleavy managing director Gregory A. Charleston. “Once you deal with that baggage,” the turnaround consultant says, “you can potentially sell the pieces.”

Yves here. So you think this can be quick and surgical? Look at all the stuff that has to happen. Returning to the piece:

At the very least, GM needs to modify labor pacts to lower costs for existing, longtime workers, which may be difficult if not impossible, given recent contract modifications. And then there’s the question of brand elimination and its effects. While such actions might not be technically included in labor deals, any actions concerning workers would force more talks……A new deal doesn’t necessarily drastically alter GM’s pension or healthcare costs. According to GM spokeswoman Julie Gibson, the U.S. pension plans for salaried and hourly employees are “overfunded on a combined basis.”

UAW retiree healthcare costs of roughly $46.7 billion, meanwhile, are set to shift to a voluntary employee beneficiary association, or Veba, in January 2010, in exchange for set payments by GM negotiated last year. A similar deal with another union, the IUE-CWA, takes effect two years later.

Still, even here lurk potential pitfalls. Thomas Salerno of Squire, Sanders & Dempsey LLP says “overfunded is an estimate” and that the debtor has to work to avoid contingent liabilities — another sign that Section 1113 or related Section 1114, which governs rejection of retiree benefits, needs to be invoked. Plant closures can spark early retirements, which can turn overfunded plans into underfunded ones in a hurry.

GM won’t reject its pension plans, however. To do so, says attorney Carol Connor Cohen of Arent Fox LLP, the debtor would have to show that it and related entities couldn’t stay in business with the need to make payments on the plans. “I’d be very surprised if they could meet that test,” she says.

But healthcare is a different matter. The automaker has already deferred $1.7 billion in payments to the UAW Veba and could seek further deferrals; SEC filings indicate GM must either contribute $5.6 billion in 2010 — a tall order — or make annual payments of anywhere from $421 million to $3.3 billion through 2020. An additional $1 billion contribution is due in 2011, and $285 million of other payments is due on the implementation date.

Robert P. Simons of Reed Smith LLP says GM “shouldn’t kick the can down the road like what happened with the steel industry during the 1980s.”….

With fewer personal ties to union management, new GM management is in a better position to invoke Section 1113 and Section 1114 and negotiate rolled-back benefits.

The same equation holds for GM’s bloated dealer network….

Less cut and dried are GM contracts with parts makers. The ripple effect of GM’s woes extends over hundreds of suppliers. That’s why payments to them won’t be interrupted. But there are certain suppliers GM realizes it no longer needs as the bankruptcy progresses….

The remaining suppliers will have to restructure with the support of GM — and their lenders — to supply parts for future GM vehicles, Robertson says. She acknowledges this won’t be painless. “There will be a lot of casualties along the way. A lot of people going out of business….”

Yves here, I’ve spared you a lengthy discussion of GMAC and how that impacts dealers. Again to the story:

Eventually, sometime in late 2010, GM resolves its issues with GMAC, dealerships, parts suppliers and unions. Asset sales are now well under way or concluded under the auspices of the bankruptcy court. A new capital structure has been welded to a new, streamlined operational chassis. And there are some nifty, new fuel-efficient cars, too….

And after a creditor vote and a closely watched confirmation hearing, a trim GM rolls out of court one blustery winter day in Detroit and heads into the automotive future.

I’m always a bit leery of relying on single source, but The Deal is for lawyers and M&A/private equity/bankruptcy professionals. Its reporters cover that beat intensively and (as you can see) do detailed reporting. The timetable their sources gave for a GM bankruptcy is close to two years.

What is Team Obama smoking? It isn’t to their advantage to have an unrealistic view of the process, yet the pronouncements strongly suggest they haven’t done sufficient due diligence on what this entails.

And consider this comment from a reader:

The “Chapter 11” reorganization idea is an assumption. There is little contemporary evidence that a Chapter 11 reorganization of GM can succeed under the current system. A Chapter 7 bankruptcy liquidation is more likely. And there is no evidence Chrysler will do anything other than liquidate.

It would be better if we were wrong, but this looks like Lehman redux. The powers that be are getting bailout pushback, and aren’t willing to take any financial perps out, so by default it’s Big Auto. And if they miscalculated, the consequences will be catastrophic. It won’t simply be GM and Chrysler, but the parts makers, and the transplants will take hits due to the loss of suppliers. GM and Chrysler are not isolated players, but major components in a large ecosystem. There are no good answeres here, but the Administration does not appear to have thought this out (how many balls does Geithner have in the air, including the G20?). A miscalculation here would have major repercussions. But Andrew Mellon would be pleased.

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  1. Anonymous

    But the banks are too big to fail.

    Financial fascism is ok but kill the unions.


  2. MyLessThanPrimeBeef

    Along the line of good bank, bad bank and good GM, bad GM, we should also have good government, bad government – the later is where all the counterproductive government workers and politicans go.

  3. Anonymous

    The overarching problem is that there’s just gigantic overcapacity in the auto sector. Firms are going to HAVE to fail until some sort of profitable equilibrium is restored.

    I’m with you on nearly everything, Yves, but what specifically do you want done here?

  4. Anonymous

    Isn’t Obama doing what is humanly possible for a President? The job of a good president calls for far more qualities and capabilities than most if not all other intellectual pursuits which are almost always too narrow, politically not feasible, short-sighted and not comprehensively practical.

  5. Anonymous

    Ya get the feeling that GM is an example for what happens if you don’t play ball.

    Left alone GM would enter Chapter 11 bringing the Unions to renegotiate with lots of money…er, I mean lobbying of Congress to support their new deals.

    Big oil wanted GM vehicles made but Government Motors knows best with midget cars being less polluting.

    If GM would have just stayed out of financing and stuck to producing maybe they would had a chance of survival.

    You know the government is liberal, liberal with others people’s money. The market place would have decided GM’s fate with help from the courts, now there is no telling if any part of GM survives. Obama guarantees that.

  6. Aiden

    Perhaps this is why Obama is letting Chrysler file first? So, if the BK of Chrysler causes real problems and goes into liquidation then they will support GM and the parts suppliers in some sort of conservatorship like AIG. This is just conjecture on my part, but seems plausible.
    The other (crazy) thing I am thinking that could be done is that they will force congress to pass special bankruptcy legislation that could allow the administration itself to administer the BK and force the bad parts (all liabilities/old brands) of GM into BK, and the good parts (Chevy, Cadillac, & Buick) to be given to the UAW and the bondholders. Hard to say, but this whole thing is shaping up to be quite a mess.

  7. Thomas

    How about a new law applying to payouts received from bankrupt auto-makers: Every stakeholder receiving any payout whatsoever from a bankrupt automaker will be taxed at 90 %.

    Unless all stakeholders agree to immediately sell the “good parts” of GM for a low price into a new entity, which will restart with a clean slate. Equity ownership stakes of the new entity are given to all stakeholders.

    Of course that would still leave the unfunded pension liabilities, which would have to be taken care of by the government (and probably cut to some extent to reduce the gargantuan amount).

  8. cap vandal

    I’m with Nemo …..

    The best chance of not having a BK is to announce that it is probable.

    The creditors need to make their best deal now.

    Same with the unions.

  9. Taunter


    First of all, I agree with Nemo that these leaks are primarily aimed at scaring the creditors.

    Secondly, while bankruptcy cannot be a prepack, especially with the “good GM, bad GM” strategy that is on the table – I analyze it here:
    – it remains the case that bankruptcy is the ONLY option that can create a viable GM.

    Each of the challenges to an orderly bankruptcy that you describe – the dealers and their ridiculous contracts (backed up by state law), the pension (I don’t think it is supportable), the various supply deals – can only be addressed in a court process. To stay out of court is to doom the firm to retain its outrageous liabilities ($188bn against $110bn of assets); there simply is no way to wrangle enough concessions.

    The only adverse effect of a bankruptcy filing – and it is a big one – is the risk that sales fall off a cliff during the bankruptcy period. But with the government standing behind warranties, the major customer-facing problem is solved.

    Bankruptcy is a lousy option, but it is better than all the alternatives.

    For more on restructuring GM:

  10. esb

    Obama is fundamentally a con man, a manipulator of words and people and little else.

    I suspect he believes that a bunch of players go into a room, a bunch of lies are told (some more convincing than others), deals get made and the problems simply solve.

    Then there is the subsequent press conference, and the words flow freely from his lips.

    This is how politics works, and politics is all he knows (or cares to know).

    We are all in great danger.

  11. Swedish Lex

    Quick and surgical is obviously not possible.

    How about quick, brutal and massive?

    Would it not be possible to avoid Chapter 11 and instead adopt special legislation that would apply to GM and Chrysler only saying two things 1) shareholders wiped out and 2) bondholders have to take the cuts necessary to establish solvency?

    Then the companies could continue their re-organisation without having to spend most of the time in courts and responding to media.

    The pain would be felt through the system for some time, but it would be clear, fast and not as bad as the alternatives.

  12. FairEconomist

    The administration may be leaking to force the creditors to renegotiate, but there’s no point. There are too many creditors for anything to happen voluntarily. Incidentally, the UAW *has* made concessions, and offered more, but it’s entirely moot. Current labor costs are a relatively small part of GM’s problems. Pensions are a problem, but there’s a limit to what the UAW can give away there. Notice that even kicking every GM pensioner out of the street with nothing (45 billion) can’t cover GM’s shortfall (77 billion).

    So a BK of some sort is the only hope. I agree with Swedish Lex that it could really help if Congress passed a law to deal with the situation. The model of having a good company free of most debt owned by a bad company with the debt attached would be good here, as in most cases.

    We need a new name for the idea of restructuring a company into a functional part and a nonfunctional part, with the nonfunctional part owning the functional part. It’s been called “good bank/bad bank” but that usage is hopelessly corrupted by the “bad bank” proposals. What should we call that? Lifeboat restructuring? Equitization? Fair Equity?

  13. Anonymous

    I would seize all of the assets of Dick Fuld, Angelo Mozillo, Hanky Paulson, and the other masters of the universe, and buy them newly issued GM stock at $88 a share. If all their worth was in GM stock, they would surely turn the company around.

  14. eh

    Emperor, clothes. Albeit he did inherit a difficult situation (to say the least), it’s funny to watch the MSM more or less ignore Obama’s bumbling. Then again his competence or ability as a ‘leader’ was never the most important thing about him — his skin color was, as the politically correct lovefest that was the MSM coverage of his campaign attests. But I don’t see how anyone could or should be surprised. What is his background? Never completed a single term in Congress. Legislative accomplishments? Practically nil. In his earlier life he was mostly a shakedown artist looking for ethnic spoils on behalf of the ‘black community’. Never had a ‘real job’ as far as I can tell. Perhaps something of an uncharitable characterization of His Obamaness, but not entirely inaccurate either.

    Anyway, it’s been pretty clear for a while that with market conditions deteriorating so starkly bankruptcy was the only option for GM (probably for Chrysler too, although there Fiat is a possible investor). In a normal operating environment perhaps a few strategic cash infusions (loans) might have tided them over. Not now though. It’ll be pretty ugly.

    Hard to predict what the market reaction might be though. Could see a big rally with that uncertaintly removed.

  15. brad

    I agree with Swedish Lex and Aiden. Congress has the ability to create “special” legislation which will spell out what the equity holders, creditors, unions, pension, veba, dealers and suppliers will receive. Everyone will take a haircut, some much more (equity holders wiped out)then others (supplier made whole). Since Obama came from the legislature, he knows all to well that the rules of the game can be rewritten at will. No other restructuring need occur. Operations are not interrupted. GM’s liabilites will be “reset” thereby substantially reducing it’s costs allowing it to operate on, at a minimum, break even basis. Who gets what will be dependent on congressional whim. After all, capitalism is just a game governed by rules written by legislatures and those rules can be changed by the powers that be.

  16. eh

    Would it not be possible to avoid Chapter 11 and instead adopt special legislation…

    Shouldn’t the government take ownership of the company first? For example via a massive cash/equity infusion. I don’t see how such a step could even be remotely justified otherwise.

  17. Anders

    somme => some
    liqidiation => liquidation
    "ut what about GM's" => "But what about GM's"

    Thanks for an interesting article!

  18. Anonymous

    And then there is the “Let’s find product to build profitably” problem.

    What if the new GM finds big SUV’s, trucks and Corvettes are its bread and butter when Congress wants subcompact ‘green’ cars?

    Cadillac,e.g., is hardly the marquee to offer fuel economy as a selling point.

  19. Swedish Lex

    @ eh

    A government that mangest to find legal loopholes to justify torture and keeping human beings locked up forever without access to justice can surely find a way around this too if it feels compelled to.

  20. Anonymous

    If it’s ok for IT families who’ve lost jobs to India and China to be forced to retrain in health sciences and pay for it themselves, then it’s perfectly ok to expect autoworkers to do the same.

    You can see Alan Greenspan as a front for a private bank cartel, or you can see him as Bernie Madoff to the entire US and jail him.

  21. charlie

    GM is a global company? Talking about selling Chevy and Caddie to a NewCorp is fine, but there are a lot of links under the surface. For instance:

    1. Chevy Malibu is a Opel
    2. ALL of Buick in China are Holden/Opels.
    3. Most of the other cars sold are Daweoos

    What this comes down to is newcorp can only sell pickups and few SUV models. Knife the cars — globally. Maybe you can sell the global operations as a unit, but it makes no sense to keep Caddie around at this point.

    Whatever you think of Buick. SAAB, Pontiac, etc — these are some of the biggest brand names in the world. Billions of dollar of value gone.

  22. John Rosevear

    There’s a point that isn’t being discussed… if GM blows up, the suppliers blow up, and then not only the transplants but Ford is in deep, deep doo-doo. Ford is still very much a giant global concern that is just as complex and interconnected as GM.

    Then we start to worry about companies like Goodyear, steel producers, a whole lot more dealers, etc., etc.

  23. Anonymous

    The best chance of not having a BK is to announce that it is probable.

    The creditors need to make their best deal now.

    unsubstantiated thought:
    it is felt that there are more CDS contracts on GM than any other company ever, by orders of magnitude. given opacity, can’t say for 100% sure of course.

    2 thoughts on this
    1) allowing GM to BK triggers the CDS problem. as we saw with Lehman, the contracts did NOT net out. Unfortunately, given our opaque CDS market we have no way of knowing who holds what. Nobody foresaw that a Lehman BK would force the Reserve Primary Fund to break the buck and start a run on the Money Markets. (requiring US backstop to Money Markets).

    In other words, GM blowing up takes who with them due to defaults and possible cascading cross defaults?

    who holds these CDS? Many of them are “gambles” by outside players, but a fair number are held by creditors I’d guess. (again, no way to substantiate). Thus, many creditors will be UNWILLING to deal because they come out fine through the CDS even if GM goes BK. (ignoring counterparty risk, which they all ignore IMO).

    CDS means creditors are less likely to deal.

    Lastly: there is no doubt in my mind that many of these CDS are held by the various banks. CDS implodes and now we must save the financial system again. (makes me want to puke).

    Our leaders are fools. They shovel tons of money into AIG to use as a conduit to the big banks, and gaurantee everything under the sun for insolvent banks like Citi, and then let GM fail.

    (FWIW: I think they should let ALL of these companies fail… I just find it ironic that we cannot possibly let a bank fail, but let one of the largest companies on Earth fail in a “surgical” BK)

  24. sanjay

    All the moves that this administration have made so far highlight a basic split in their thinking- do they want to be free market or interventionist. And as a consequence they end up with neither- memo to the President compromise is not always splitting the difference. The GM bankruptcy is a case in point. I don’t think that it is a crazy idea to pass a law which gives BK judges (or event the executive branch) greater powers in the case of systemically important entities. All those who would argue with their hair on fire “we have to honor contract, what about the free market” need to just shut up. When you come to the government for a bailout you have lost the “honor contract/free market argument”

    As Lincoln said- a house divided can not stand. It was good advice then it is good advice now. Either let the free market operate or intervene but lets cut out the current bullshit.

  25. Anonymous

    As usual, lots of bitching about how the automakers are being treated, especially in comparison to the evil bankers, but no solutions forthcoming from Yves. Not even an attempt at a pretend solution, like the hypothetical bank bankruptcies that wouldn’t look like Lehman if just “done right.”

  26. Bendal

    Until consumers start buying cars again, it won’t matter what is done with the car manufacturers; why is it considered reasonable to continue making vehicles no one is buying?

  27. Anonymous

    Hitler had a great idea in a ‘peoples car.’ That idea still lives on today…

    unfortunately there is still the sense of monetary entitlement that those at the proverbial top have which actually reduce the effectiveness of any company.

    Chop off the top!!

  28. Anonymous

    In other words, GM blowing up takes who with them due to defaults and possible cascading cross defaults?

    Look beyond the paper world of CDS! If and when GM files BK it stops paying its pre-filing accounts payable to its legion of parts and materials suppliers. These are classed as “Trade Creditors”.

    To my understanding it legally could not pay them for pre-filing debts without BK court approval. I assume that means having an approved reorganization plan, either agreed to by other classes or crammed down by the court. Other classes of creditors would certainly object to such distributions before hand.

    In many cases the loss of the GM pre-filing receivables will be sufficient to officially wipe out a supplier’s working capital. We’re not dealing with Big Supplier-Small Debtor ala Circuit City or some real estate developer. GM is bigger than every one of its suppliers and is typically their biggest single customer.

    I don’t know (and neither do Rattner or Geithner know) how many of these suppliers have loans with covenants triggering default and accelerated repayment in such an event.

    Domestic USA industrial capacity utilization is already down to 70%. I expect GM’s supplier base is well below this average factor. iow, many are already operating below their break-even points.

    For modern Ivy League Wall Street MBAs’ info, break-even is the revenue point needed to meet an industrial concern’s fixed overhead charges. These comprise things like real estate taxes, insurance, mortgages, capital equipment lease payments and front office salaries and bennies. Probably your friendly Chinese industrial outsource trading partner doesn’t bore you with such minutiae.

    A GM BK will lead to further contraction of output.

    How many more corporate BK filings will this trigger? I dunno. And neither do Rattner or Geithner. Maybe Team Obama just wants a stimulus plan for bankruptcy lawyers.

  29. ExBanker

    At the risk of looking past the very short run, I would posit to those advocating a revised or executive branch-led bankruptcy regime to think about the degree of uncertainty that increases in all fixed income and derivative assets. This is yet another example of opening up pandora’s box of uncertainty and executive power, with little thought given to system-wide effects, and another manifestation of the technocratic ideal that is so in vogue with the current administration and its muses. Playing fire chief and solving the problems in front of you, while disregarding the disorder the solution will cause in the medium run is not leadership, it’s middle management.

  30. Anonymous

    Ah, the implication that GM is “too big to fail.”

    Look, the issue is not whether a GM liquidation will have a “cascade effect,” i.e. a negative impact throughout the economy because of GM’s interconnectedness with other firms. That’s the risk of doing business with GM. When GM does well, interconnected firms will do well. When GM faces liquidation… well, those related firms may face liquidation as well.

    That interconectedness does not imply that the taxpayer at-large should prop up GM. To imply this is to say that doing business with GM should have no real risk.

  31. Anonymous

    Ah, the implication that GM is “too big to fail.”

    No. GM has already failed. I don’t know of anyone denying this.

    The issue is the economic complex called “GM” is “too big” to be restructured through the agency of a US Bankruptcy Court operating under Chapter 11. Chapter 7 is not acceptable because of other social costs that are already backstopped by the gummint.

    There are only two lenders that can and might provide debtor-in- possession financing for a GM Chapter 11 attempt. These are the US Department of the Treasury or the Federal Reserve.

    Ad hoc improvisations by Team Obama won’t change this. And unless the US Government commits to providing full DIP financing no judge can even attempt to mediate a Chapter 11 reorganization. You cannot reorganize as a going concern an entity that has already ceased all operations and lost all its customers.

    However, it seems many people forget who GM’s single largest creditor will be in a BK filing.

    It is (envelope please) the Pension Benefit Guaranty Corporation! Which entity is backed by the full faith and credit of the US Government.

    What’s undoubtedly needed here is some kind of “Industrial Resolution Trust Corporation” to handle GM, Chrysler and lots of other soon-coming roadkill.

  32. Anonymous

    social costs

    Well, this is where we differ — I deny that there is such a thing called “social costs.” There are only individual costs, and in the case of a GM bankruptcy those individuals having ties to GM (employees, bondholders, affiliated firms, etc) will suffer.

    This is not to make light of those individuals’ plight but to assert that it is their plight. The taxpayer (i.e. other individuals) should not be responsible for the decisions of these GM-affiliated individuals.

    If Chapter 11 bankruptcy is not possible due to the convoluted contractual obligations that GM has arranged then Chapter 7 will have to be their option — thereby also suggesting to other firms to not have contractual obligations that disbar them from having Chapter 11.

  33. gaius marius

    i’m sure treasury DIP is part of the prepack — unless the folks in the administration are plain stupid, and i feel badly for having to tap out that caveat.

    but i agree with anon @ 953:

    Our leaders are fools. They shovel tons of money into AIG to use as a conduit to the big banks, and gaurantee everything under the sun for insolvent banks like Citi, and then let GM fail.

    spend countless hours healing a man just to shoot him in the leg. i sincerely wonder if even the outline the financial consequences are understood upstairs. GM and chrysler are on the reference list of every synthetic CDO of 2005 vintage and earlier. that very large pile may run from par to zero with just these two BKs. it shouldn’t be just the single-name CDS that scare anybody. there’s a whole asset class that could vanish in a couple of court filings.

    the financial fallout is what could be avoided — i’ve little to add on the “real economy” consequences to the supply chain except to say, “so much for demand management.” they’d best draw up a several hundred billion dollar stimulus 2.0 to pass within a week of doing this. i bet you’ll need a microscope to find treasury yields in the aftermath.

  34. DanyBoy

    Please get it straight: Obama will take advantage of Michigan’s dire unemployment crisis to rob the Autoworkers in order to svae bondholders a major haircut. Rumors support a 40% salary/benefit reduction. SHock and awe for the bond vigilantes!

    The bond vigilantes strike again: they have pushed the Obama administration into a Reaganesque anti-labor offensive, reminiscent of thae Air Traffic Controller Strike of 1981.

    Since those rumors began the market has been rallying on mostly bad economic news and despite uncertainty.

  35. Anonymous

    This is not to make light of those individuals’ plight but to assert that it is their plight. The taxpayer (i.e. other individuals) should not be responsible for the decisions of these GM-affiliated individuals.

    I suggest you get yourself elected as a veto-proof Congressional majority. Then you can rewrite the existing legislation to conform to your ideals. Specifically the PBGC backing of corporate pensions.

    LTV was mired for several years in one its Ch 11 bankruptcies solely over the PBGC angle.

    It’s possible the Rule of Law and two of three federal branches have entirely ceased here, in which case Obama can wing it day to day like Mugabe does.

    If not then this is going to be in litigation for a decade or more.

    I can name another large creditor class of 7 million or so who will make themselves heard, and who will be organized into a class with very capable legal counsel. This is everyone who currently owns a GM product under a warranty that GM will cease to honor after it files Ch 11.

    We’ll see how much Congressional backing Obama has after they contact their local Congresscritters in great displeasure. That averages to 16,000 per Congressional district.

  36. Anonymous

    Yeah, with the government (taxpayers) supporting the banks, AIG, mortgages and now the auto industry along with counter measures like FDIC and the like, you can see where this is going……hyperinflation including a currency meltdown since there is nothing left to back it.

    Auto stalls, AIG insures it, more banks default as loans can’t be paid back, FDIC kicks in, no one can afford to pay their new re-worked home loan…it’s a spiral out of control, right down the toilet as to much paper currency will backup the toilet. Whadda mess.

  37. eh

    So ‘Anonymous’ is having a go at…’Anonymous’. Why don’t both of you do away with a distraction and click on “Name/URL” and pick some simple text moniker (“Name”).

  38. curlydan

    A few thoughts:
    1. It is too complicated to do a pre-pack BK, so Team Obama will try to scare the competing parties to negotiation
    2. Team Obama rarely has the details flushed out, even to the level we got in the above blog posting, so you know they haven’t thought through a real BK like we’ve just discussed
    3. Once the dream of a pre-pack is put to bed and the real thought of a punishing BK is front and center, then the reluctant creditors will get a better deal from the govt, suppliers will get good payment terms, and the “BK” will be subsidized and somewhat sterilized using our money again (preferably without Congressional approval–not sure how they’ll do that but they been doing it so far)

  39. Anonymous

    >2. ALL of Buick in China are Holden/Opels.

    Oh thank you, thank you. I've been completely mind-boggled since I read the first variation of the phrase "Buicks are very popular in China".

    I had all these funny mental pictures of ancient Chinese men (and hey, they are an aging society) creeping down the middle of Shanghi's main strip, brake lights on whilst their beehive-hairdo'd wife natters away at them.

    Seriously, Buick is especially weired because although they have for long had exceptional quality, as far as functionality there is nothing they have that Hyndai couldn't knock off in like 15 minutes.

    — a different chris

  40. Eric L. Prentis

    Advisers to President Obama, Geithner/Summers/Bernanke and investment banker Steven Rattner, head of the government’s Auto Task Force, which represent the corrupt Republican-like neocon financial cabal, are playing out a suitable bankruptcy strategy for the insolvent Wall Street banks and inappropriately applying that same strategy to GM/Chrysler in the manufacturing industry.

    I believe the financial elite want to make an example of GM/Chrysler and how bad their bankruptcy will be so they can argue that no bank should be put through that same process because the economy is now too weak. This is a win-win for the effete financial elite who want to get rid of auto labor unions and in addition they can save all their precious banks using many trillions of taxpayer dollars.

    If GM/Chrysler go into a complicated bankruptcy they will, without a doubt, BE LIQUIDATED, because, cars are sold to the public whose decisions are personal, i.e., people don’t by losers, cars are extremely costly and people won’t take a risk on a bankrupt company’s product and cars are incredibly complicated machines requiring full faith that parts and service will be available over the long term. Consequently, a bankrupt GM/Chrysler will have no customers, in addition, no auto company has EVER emerged from bankruptcy, end of story! America gets screwed just to save the bankers, and Obama goes along? President Obama, please wake up before it’s too late, time for a new financial team.

  41. BondsOfSteel

    RE: CDS contracts on GM

    Who at this point would have unhedged GM CDS? You would have to have had your head in the sand at this point not to realize that GM is collapsing and those CDS contracts may be called at up to 100%.

    IMHO, part of the govement proping up too big to fail companies should be going counterparties time to unwind in a sensible fashion.

    At this point using CDS as a excuse not to put a too big to fail institution running on taxpayer dollars into BK is just rewarding moral hazard.

  42. Anonymous

    1. It is too complicated to do a pre-pack BK, so Team Obama will try to scare the competing parties to negotiation

    They can try but they’ll fail. A creditor class that Obama says he wants to zero out – existing GM warranty holders for instance – have no incentive to negotiate or agree to anything. Their only hope is to preserve their legal position intact for appeals up to SCOTUS. And the attorneys the bankruptcy judge appoints to represent this multi-million strong creditor class will know this.

    2. Team Obama rarely has the details flushed out, even to the level we got in the above blog posting, so you know they haven’t thought through a real BK like we’ve just discussed

    Nope. Obama’s warranty plan is a classic case in point. Existing GM owners under warranty are not covered by his proposed government backed new car warranty program.

    What he’s proposed so far is what might be distilled from reading the blogosphere and watching CNBC: “no one wants to buy a car without a warranty”.

    True. And that extends to dealers who are “buying” late model trade-ins while selling new cars.

    Until now a great many people have done trade-ins every few years, often right when they pay off a note. With 5 and 7 year warranties now routine this means their trade-in’s resale value is partly based on a still valid factory warranty.

    The resale value of such trade-ins will be reduced as they instantly fall out of warranty. There will be another leg down on new vehicle sales from this cause alone. A lot of would be buyers’ “down payment” nest egg will vanish.

    Certainly Ford, Honda, Toyota and any surviving GM dealers will not be able to offer what they once did for late model used GM trade-ins.

  43. Anonymous

    Yves, I believe most of us are like you–already fed up with the rhetoric that comes from this Administration. Their plan seems to center around manipulating public opinion. A few examples: seize banks on weekends so that investors can’t panic; spend trillions, but assure the public that we will have balanced budgets; show indignation at AIG bonuses, but do nothing about them.

    The already-weakened domestic auto industry was a soft target for Team Obama. Seriously, Detroit cannot possibly react fast enough to satisfy all of the governmental conditions laid upon them. So, it looks like they will be the Administration’s whipping boy, in lieu of the banks.

    One day this Administration’s honeymoon will be over. Then we will find ourselves massively in debt, the dollar seriously devalued, and many jobs gone forever. Henry Morgenthau, Jr.–where are you?

  44. Anonymous

    Everyone should be aware that rejection of a collective bargaining agreement in a 2nd Circuit Bankruptcy Court (New York) does not give rise to contract rejection damages, unlike the rejection of other employment contracts. So we could get an absurd result in which the management of GM gets an unsecured claim for the rejection of their employment contracts but the UAW gets no claim on behalf of its members working at GM.


  45. Eleanor

    So, Obama and Summers blow up the Midwest, while they keep feeding gazillions to the New York firms. Do the Democrats keep winning elections in the Midwest? Why would they? Michiganders are not utterly stupid.

    As far as I can see, the New York financial firms we are bailing out do nothing useful. GM and Chrysler’s make cars. I don’t like cars much. I am a mass transit person. But a car is a lot more useful than the esoteric financial instruments that Wall Street has produced in recent years. To me, these look more and more like ponzi schemes and tax dodges. Even a tulip bulb is a better deal; and a Saturn sedan is a way better deal.

    I say, save the car companies and nationalize the banks. Send in the FDIC to see if they have any money; and send in the FBI to find out how crooked they are.

    My bet is, they are completely broke and very crooked.

  46. Anonymous


    The only US Chapter 11 case of comparable scope to the proposed GM Ch 11 filing was the Penn-Central Railroad bankruptcy of 1970. Among other things this led directly to the creation of Amtrak, which is still with us today.

    After six years in Chapter 11 it was finally accepted that private reorganization of the P-C’s freight operations was impossible. In 1976 Congress created CONRAIL to nationalize the Penn-Central, along with six other bankrupt railroads.

    Eleven years later in 1987 it was finally possible for the federal government to reprivatize Conrail as a going concern via an IPO.

    If Obama thinks he can pre-pack a GM Chapter 11 between now and June he’s back to doing the blow he’s confessed to using in the past.

  47. Kyle S

    Hi Yves,
    I’m a restructuring professional and am working at a company in a liquidating 11. Our client has hundreds of millions of secured debt and almost as much in (illiquid) collateral. L + 300 would be the steal of the century for a DIP loan from a new lender with no roll-up, illiquid collateral, and a potential liquidation. New money DIP term loans for overlevered but otherwise healthy businesses are being priced at L + 1000 bps or higher from existing lenders who get to roll up some of their prepetition debt with some DIP proceeds. L + 300 would be a great deal for a GM DIP – probably at least 1000 bps below market.

  48. eh

    Advisers to President Obama, Geithner/Summers/Bernanke and investment banker Steven Rattner, head of the government’s Auto Task Force, which represent the corrupt Republican-like neocon financial cabal, are playing out a suitable bankruptcy strategy for the insolvent Wall Street banks and inappropriately applying that same strategy to GM/Chrysler in the manufacturing industry.

    I would not be surprised to see a quick bill passed to make changes to bankruptcy law needed for something like this. An interesting topic for Yves to address, perhaps.

    seize banks on weekends so that investors can’t panic;

    That’s been the practice for some time; I agree it is done to give the markets time to digest the news. Not that today it would be big news in any case — banks are failing rather regularly.

    A GM bankruptcy announcement will probably come on a weekend as well. And like I suggested the markets just may go higher on the news. It looks like this weekend would be good time for that — markets are (rather unaccountably) rising now — although I imagine the preparations are not complete yet.

    Michiganders are not utterly stupid.

    Like the rest of us they’re usually presented with an ‘evil of two lessers’ sort of choice, so they’re likely to look stupid no matter what they do.

  49. run75441

    As the “anon” poster has said, there are quite a few CDS tied to GM as GM could not get prime loans over the last decade and these loans were insured through the CDS process. Which may make this statement understandable:

    “Instead of signing on every creditor as is typically required in prepackaged deals, administration officials are using as leverage the promise of taxpayer financing….”

    If you do not know it, once bankruptcy is declared; CDS go right to the top and are paid in full. They are eliminated from any law governing them due to Gramm’s sponsored 2000 Commodity Trade Moderization Act. Lehman asked the court to set aside its CDS. I am not sure whether this happened or not. We are looking at another Enron where the trades are invisible and no one knows. To get around this the courts have to be involved.

    The best process for the “unknowledgeable” administration and the macro-experts employed is to allow GM to continue its downsizing in product lines and plants. Labor will follow as well as white collar. Thinking they have the knowledge of what works in products and can reorganize GM into something viable and profitable defines logic. They don’t and Summers and Geithner have already demonstrated their lack of market knowledge with their participation in what precipitated the W$ events, hence unregulated derivatives as their request.

    Chevrolet, Buick, Cadillac with GMC into medium and large trucks makes a whole lot of sense as product lines offered. 1/2, 3/4, and 1 ton pick-me-up trucks go with the carlines as the platforms are not that dissimilar and with some assmbly line changes plus programing they can be manufactured in the same plants. 90% of the costs associated with GM are in the product lines and the plants manufacturing them. Reducing it has a larger and quicker impact on making GM viable, although it does not solve the sales aspect for them or Toyota, TaTa, Nissan, Subaru, Ford, etc. Fix the economy and getting it growing again is the major issue and everything else will follow. GM is a diversion away from the administration’s inability to fix the economy. Interesting how we are being distracted from the larger issues of W$, their impact on the economy, and what is the administration doing to being it to a quick resolution.

    In 2005, GM owed $31 billion to its pension fund and now it has a surplus from the sales of a few things and bonds. Healthcare funds for retirees is shy a $20 billion. It would make sense to combine the two and relieve GM of the debt of retiree healthcare. Why anyone would want to PGBC pensions, where 40 cents on the dollar is paid out, and strip retirees of healthcare in a nation where there is no universal healthcare is beyond me. If anything, give them a 20% deductible which is normal and goes along way to solving cost issues.

    My $.02.

  50. Eleanor

    I lost my temper yesterday at the thought of putting GM into bankruptcy. (How is that word spelled? I’d better learn.) Sorry about the outburst. A lot of the other comments have been sensible and interesting and calm. I especially enjoyed the comment comparing GM to Penn-Central, and run75441 directly above.

    Note to Yves: I find dinosaurs, especially feathered dinosaurs, very calming. Anecdotes of the day featuring dinosaurs — or pterosaurs — or mosasaurs — or any kind of saur — would be very much appreciated. In these troubled times, what is better than a dinosaur with feathers?

    P.S. Birds are wonderful, but don’t count. I want something very large and completely extinct. In spite of this, I would prefer to save GM. Dinosaurs survived by downsizing…

  51. Anonymous

    “And after a creditor vote and a closely watched confirmation hearing, a trim GM rolls out of court one blustery winter day in Detroit and heads into the automotive future.”

    In the meantime, the global automotive industry is undergoing a significant paradigm shift.

    Here’s an idea of what the automotive future will look like and who the main players are likely to be:
    and here:

    Nothing in your article addresses exactly how the Detroit auto industry can position itself to ensure its relevance in this new world.

    The days of subsidization and national protectionism are over. Businesses are either competitive or they aren’t.

    The US Government can no longer continue the Gross Domestic Protectionism (GDP) that led this, once vibrant, industry to become the bloated, inefficient and failed model it now is.

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