Bankruptcy will help GM and Chrysler

Bankruptcy will help GM and Chrysler

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Detroit ?

The time has come to stop the fearmongering and face facts: General Motors and Chrysler are racing fast toward insolvency and bankruptcy filings.

That?s 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 Detroit.

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 creditors? objections and force creditors to take a stake in its future.

Compare that with the experience of GMAC, GM?s finance arm. Even with billions of government dollars at stake, it couldn?t persuade some of its biggest creditors to make a deal. That?s exactly the situation that GM is in today.

Labor concessions are also needed. While the United Auto Workers has agreed to incremental give-backs, it?s been unwilling to accept bigger pay cuts that put labor costs in line with foreign competitors?. And nobody has been brave enough to put the industry?s 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 ? 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 ? more so than begging for government dollars ? toward long-term viability.

Further, consumers have shown little reluctance to deal with other companies going through reorganization in bankruptcy ? including most of the big airlines, even though some commentators predicted consumers wouldn?t trust them to maintain safety. And the automakers could take steps to provide further assurance, like providing third-party warranties and (following Ford?s 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 wouldn?t 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.

? Andrew M. Grossman is senior legal policy analyst in the Center for Legal and Judicial Studies at The Heritage Foundation.

Reply to
Jim Higgins
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An "orderly" bankruptcy for GM is out of the question, because the investments they have in Europe and Asia will revert to the governments in those counties and force GM to be liquidated.

Reply to
Mike Hunter

Definitely out of the question-it is much easier for GM to suck blood from the American taxpayer than to go C11 and do it right.

Reply to
Jim Higgins

As usual you have not idea of what you are talking about. The loss of GM will cost the federal and state governments more in one year in lost taxes, than the amount of the loans to keep them in business. That is why GM got the loans in the first place

Reply to
Mike Hunter

Get a better grade of crack Mike, your reasoning rewards failure and incompetence. No more American and Canadian taxpayer blood for those greedy Vampires of GM-*ever*.

Reply to
Jim Higgins

Wrong. The Government will give them whatever they need, until they get back on there feet, and there isn't a damned thing you can do about it, Jimmy. Why don't you and your boyfriend arrange a play date, and you can both whine to eachother?

Reply to
80 Knight

After the fiasco yesterday with the AIG ceo, and the rather negative light that congress came under, I am not sure you can expect this.

Public opinion and outrage about the AIG affair is building, and the sentiment is ugly.

Reply to
HLS

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