Bankruptcy will help GM and Chrysler
The time has come to stop the fearmongering and face facts: General
Motors and Chrysler are racing fast toward insolvency and bankruptcy
Thatís not a bad thing. Bankruptcy is better than the alternative,
another government bailout, which two auto task force advisers to
Treasury Secretary Tim Geithner were evaluating Monday in a visit to
There was an argument to be made in October and November that the
companies were unprepared for a filing and that the results could have
been catastrophic. After months of planning and laying the groundwork,
that's no longer the case.
An orderly bankruptcy promises protection and power. From the moment of
filing, a company receives protection from its debts, giving it room to
reorganize. It then has the power, which it lacks outside of bankruptcy,
to reduce its debts, modify its contractual obligations and force
stakeholders to accept reasonable and necessary concessions.
GM in particular has had a tough time convincing its creditors to
exchange debt for stock in the company. In bankruptcy, however, it can
cram down certain kinds of debts over creditorsí objections and force
creditors to take a stake in its future.
Compare that with the experience of GMAC, GMís finance arm. Even with
billions of government dollars at stake, it couldnít persuade some of
its biggest creditors to make a deal. Thatís exactly the situation that
GM is in today.
Labor concessions are also needed. While the United Auto Workers has
agreed to incremental give-backs, itís been unwilling to accept bigger
pay cuts that put labor costs in line with foreign competitorsí. And
nobody has been brave enough to put the industryís stifling,
phone-book-thick work rules on the table.
That changes in a Chapter 11 reorganization. The law gives the
bankruptcy judge the power to make changes that are necessary to achieve
viability. That might include scrapping plant-level work rules in favor
of the more flexible approach taken at New United Motor Manufacturing, a
Toyota-GM joint venture in California that regularly wins awards for its
innovation and productivity.
A similar section of the law allows changes to retiree benefits.
Bankruptcy also provides the tools for an automaker to shut
underperforming brands and rapidly shrink its dealer network. Outside of
bankruptcy, state-level laws make these changes expensive and
time-consuming. Shuttering Oldsmobile, the most recent example, cost GM
more than $1 billion and took more than four years, from start to finish
(not counting the dealer lawsuits that are still pending).
Within Chapter 11, those state laws lose their bite. At the least, GM
could sell or turn out the lights on Saturn and Pontiac ó something the
automaker considered in its February restructuring plan that targeted
Saturn for gradual elimination and Pontiac for shrinking. Both GM and
Chrysler could focus their sales operations on the most profitable
dealers, saving billions of dollars in marketing and logistics while
improving customer experience.
Against all these benefits, the objections to using bankruptcy to
revitalize the industry are weak. The chief, voiced often by GM
officials, is that sales would collapse because consumers wouldn't
purchase cars from a bankrupt company. It's hard to take this claim
seriously, considering how much those officials have already done to
convince the nation of their company's dire finances. If anything, savvy
consumers would see bankruptcy as a serious step ó more so than begging
for government dollars ó toward long-term viability.
Further, consumers have shown little reluctance to deal with other
companies going through reorganization in bankruptcy ó including most of
the big airlines, even though some commentators predicted consumers
wouldnít trust them to maintain safety. And the automakers could take
steps to provide further assurance, like providing third-party
warranties and (following Fordís lead) setting clear milestones for
reorganization and sticking to them.
The other big objection is that the parts network would collapse,
damaging the entire industry. But there's no reason to believe the
bankruptcy judge wouldnít move fast to make sure suppliers get paid and
remain in business.
In its own way, GM acknowledges that bankruptcy is workable and has real
promise. Its latest turnaround plan concedes the company could get
through the process in a few months and achieve tens of billions in
savings, but rejects the option on the assumption sales would dive. Tone
down that assumption, and the numbers come out strongly on the other side.
ó Andrew M. Grossman is senior legal policy analyst in the Center for
Legal and Judicial Studies at The Heritage Foundation.