Let them file for bankruptcy

Glenn Reynolds asks a rather naive question:

Since total market capitalization for the Big Three is about $7 billion, why are we talking about loaning them $50 billion?

Does he not realize that GM alone has $186 billion in liabilities?

It should be pointed out that GM and Ford are the third and fourth largest American non-petroleum-related companies from an annual revenues perspective, behind only Walmart and GE. These are big companies.

However, I don't support a government bailout. The bankruptcy system is well suited to dealing with the issues related to restructuring GM and Ford.

Bankruptcy would also be a huge boon to bankruptcy lawyers. I'm not sure how much legal fees we are talking about. $100 million? This kind of pisses me off that BIGLAW lawyers will get richer than they already are.

Comments

[Sgt. Joe Friday]

Why not let them go bankrupt? United, Continental, Delta Airlines...all of them have gone BK at least once, and in some cases several times.

Perhaps I'm missing something here, but I think this "bailout" is more about preserving union jobs in states with influential legislators than it is about saving the Big 3.

[JewishAtheist]

Here's a long article about why bankruptcy could lead to losses of millions jobs:

http://www.tnr.com/politics/story.html?id=a4893b49-36df-4784-9859-2dfa3a3211bf

"One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, "Bankruptcy need not mean that the company disappears." But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's?assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

Restaurants, gas stations, hospitals, and then cities, counties, and states--all of them would feel pressure on their bottom lines. A study just published by the Michigan-based Center for Automotive Research (CAR) predicted that three million people would lose their jobs in the first year after such a Big Three meltdown, swelling the ranks of the unemployed by nearly one-third nationally and leading to hundreds of billions of dollars in lost income. The Midwest would feel the effects disproportionately, but the effect would reach into every community with a parts supplier or factory--and, to a lesser extent, into every town and city with a dealership. In short, virtually every community in the country would be touched."

[wongba]

the argument against bankruptcy is that ppl won't buy the cars b/c they're afraid the warranty and parts will disappear. i think that's a fair assumption b/c i certainly wouldn't buy from a bankrupt car company. i wouldn't bail them out either, however.

[rightwingnut]

Welcome to the third world! Where saving industries for political capital is the name of the game. The lawyers are just part of the feeding frenzy.

Its somewhat ironic that third world governments are studied like mice for saving fledgling industries -- read dead-end -- and lifting all kind of barriers to protect local jobs and the social upheaval.

First the agro industries ( which have now long been protected even in first world countries). Now the U.S is playing catch-up with the third world, where its not unheard for governments to save their 'crown jewels' given the political fallout...wait and see, the U.S entered the third world bailing out the banks, its ALL downhill from here!

[Winston Smith]

Wow! First the financial industry and now manufacturing. At this rate most of the US economy will be nationalized by Christmas. I guess it was an historical inevitablility after all.

[Brutus]

This is exactly the kind of situation that we have to say bye-bye. Their cars are crap. Let them die. Let their employees file for unemployment. Good riddance. Let an entrepreneur but all 3's physical plants and go to work on making something great--and without the unions strangling them.

[The Undiscovered Jew]

Europe's experience with preserving dead manufacturing sectors indicates a bailout would only delay the day of judgement.

[rightwingnut]

JewishAtheist points to a very interesting article...GM is the 'depression card' experts have been talking about since the summer, only now it has a name!

Experts have been talking about a near 20% unemployment rate for a depression...many said this was impossible even with the banking crisis...not that many bankers so they thought 'correctly'

But suddenly, a failure of an auto-maker and as JewishAtheist link points out the of loss of '3 MILLION jobs in the first year' makes that unemployment rate all the more real...

This is a game of chicken all right, if the current gov does not pull the 'trigger' soon, that unemployment looks very feasible for the 1st day in office come January.

[Half Sigma]

The government can provide DIP financing if no one else wants to. DIP gets paid back over all other creditors, so there's no risk that taxpayers will lose any money.

@Posted by: JewishAtheist | November 17, 2008 at 05:57 PM

And in 10 years we'll bail them out again. What have the Big 3 and the vile unions learned since their last crisis? Apparently nothing. This bailout won't do shit either, just watch. Citigroup is going to fire 50,000 people. So what the fuck did that $700 B do for that industry? I was against the Wall Street bailout and I'm against this as well, especially when the Fed told anyone who wanted to know where the cash was going to fuck off. Prolonging the inevitable is going to make the the coming economic crisis much worse than it was going to be. What a fucking disaster...Everybody had better be prepared for the shit storm that is brewing. There will be shooting and it will not be fun.

[rightwingnut]

No DIP for GM, that's what some experts say...and by the analysis on DIP financing, even by the government it sounds the same as buying 'troubled bank assets'...an investment LEMON by every standard with A LOT of risk.

Here is the link.
http://money.cnn.com/2008/11/13/news/companies/gm_bankruptcy/index.htm

Without DIP financing, liquidation -- usually under bankruptcy Chapter 7 -- may be the only option left.

Experts in the field and even GM itself say that DIP financing might not be available for GM.

"The state of the capital markets does make the prospects for DIP financing a much bigger question mark than would have been the case in other times," said Bob Schulz, Standard & Poor's senior auto credit analyst. "To reorganize does require financing."

Others question if GM would be shut out of DIP financing entirely. But even they say it would come at a steep price.

"I would say it is likely that they would find some financing," said bankruptcy attorney Ronald Silverman, a member of the American Bankruptcy Institute who recently spoke on the outlook for the auto sector. "It may not be inexpensive financing. But there are investors with cash interested in investment opportunities, and DIP loans are among the most attractive investment opportunities."

Still, the fear that car buyers won't want to buy cars from a bankrupt automaker may preclude GM from financing. For example, a recent survey of car buyers found that as many as 80% wouldn't even consider buying from a bankrupt automaker.

"You don't qualify for DIP if you don't have certainty about your revenue base," said Tony Cervone, a GM vice president.

[Patrick]

Bankruptcy, while a deserving fate of a company as stupid and poorly-run as GM, will not prevent the macro-economic fallout that the Congress is looking to avoid. Sure, its not known what exactly would happen if GM or Ford were to go out of business, but its safe to say none of it would be good, unless you're a foreign auto importer.

What free market zealots don't like to acknowledge is that the consequences of failure in the market can be so dire that they completely sour public opinion on the idealism of free markets.

Unless and until they find an ingenious way to spin General Motors' (no less than an icon of American Capitalism) monumental collapse as a virtuous result of the invisible hand, well, good luck. But its a lot harder to propagandize to that effect these days.

Secondly, why allow GM to screw its creditors over in bankruptcy court while we're in the process of nationalizing most of them?

I'm not saying the bailout will work, but the potential upside of it looks far better than the known downside of not doing it.

[Bruno Brazil]

Can someone explain me what GM and Ford had differently from other automakers?
What does a Chevrolet car have different of Renault?

I hope the US doesn´t copy the behavior of the empire it replaced: Britain. The english built after the WW 2 a massive park of "economic zombies", inviable industries that only survived because of massive subsidies. Does anyone remember the truly british automakers: Morris, Austin, Jaguar? They went belly up or were sold to bigger companies;

The failure of the big 3 reminds so much the failure of the british empire on the 50´s, 60´s and 70´s

[Bruno Brazil]

Personally, about the big 3, i prefer they were reorganized and sold out to foreign automakers instead of shut down. I accept the bail, as long as this means passing the companies to more efficient.

If the americans get too nationalistic to do that, they deserve to pay the price of the 3 being bankrupt.

[mnjohn]

You have an obsession with BIGLAW. I find it comical.

[mnjohn]

I have a question for anyone on here that might know. Since BIGLAW gets brought up so often here, does anyone know what someone who started in BIGLAW but punks out to in-house makes? Like once they reach general counsel level. I'm just curious as I have a friend who just got accepted into Duke Law.

First, I don't understand why DIP financing would dry up. Wouldn't the terms and interest rates simply change, not the actual availability of financing?

Second, are the US automakers unable to get dip because of the credit crisis or because it is a high-risk company?

Third, this talk about efficiency is meaningless. The European Union routinely refunds the VAT taxes to any company selling to the US. That is an enormous subsidy. GM and Ford cannot compete when foreign countries are busy subsidizing their own firms.

[Chic Noir]

On CNN, one of the panelists mentioned that 1in2 US jobs are tied to the big three in some way. Not only with GM and the like go down but many other businesses that rely on work from the big three will go under as well.

[Chic Noir]

If GM gets a bailout, there should be some stipulations tied to the bailout such as:
1. must build smaller cars.Curtail the number of large SUV being made.
2. better gas millage for those smaller cars.

[David Alexander]

*I'm not saying the bailout will work, but the potential upside of it looks far better than the known downside of not doing it. *

If we deny a bailout, are we prepared to prop up the PBGC, Medicare funding, unemployment benefits, and deal with the the various effects of unemployment on local economies and foreclosures?

[.net sith]

The decision between foreign and American is already tenuous.

Though the reliability of U.S. auto companies is mostly on par with foreign rivals the public perception remains the same.

A bankrupt GM or Ford simply will simplify the choice between foreign and American for the average citizen.

Bankruptcies work best for companies that don't require the consumer to make a long-term investment, or one for companies that sell to other companies like delphi. A bankruptcy for GM or Ford will mean a significant loss in sales, something that they can't afford.

Can we at least agree on one thing? Rick Wagoner needs to go. A hybrid escalade? As if people who buy a brand new 50+k SUV even consider what type of mileage it gets.

Rick's answer to the prius: put the hybrid train in biggest trucks and suvs where the fuel savings are less significant. Ignore the fact that half the people buying the prius do it for gaia fuzzies.

Shareholders today have become total pussies. Both Rick Wagoner and Bill Ford should have been sacked a long time ago.

[Nathan]

There is a huge risk with letting GM fail. If (as JA has linked) GM is unable to obtain DIP financing because people are unwilling to buy a cars from a bankrupt auto maker, then GM will have to liquidate and cease operations. This will, in turn, destroy the other two american automakers since their parts suppliers will go out of business. This would lead to hundreds of thousands of job losses.

However, I don't see how GM (or the other Big Three) can continue to operate in their current form. For example, GM alone loses 1 billion dollars a month. Giving them 25 billion in "bridge loans" will only buy them some time. Unless taxpayers are ready to continue to subsidize the Big Three, they will eventually fail.

The reason that the Big Three are failing is because of the UAW, its dealer contracts, and its real estate holdings. Simply requiring them to make "green cars" is not enough. This is simple supply and demand. The damand for ALL cars is down and will remain down for a while. Thus, the supply of cars that the big three supply to the market will have to go down as well.

Another problem is that the Big Three can not compete with Toyota & Honda. The hourly cost of making cars for the Big Three is about 50% more than than the cost of making cars for Toyota & Honda.

The Big Three need to radically change their business structure to survive. They need to renegotiate their labor contracts with the UAW, renegotiate its dealer contracts, and sell of large portions of their real estate holdings.

This can only happen if they go into bankruptcy protection, but if they go into bankruptcy protection, they will be swallowing a "poison pill."

Even Half Sigma's suggestion of providing the Big Three with DIP financing is not a real solution. The Big Three will not be able to get DIP financing from the market (since there are serious questions about their revenue stream given that people will not want to buy cars from a bankrupt automaker), so it will have to come directly from the government, and the Big Three will need DIP financing for a long time. Essentially, this is a bailout by another name.

In short, the Big Three US auto makers are DOOMED.

[.net sith]

"They need to renegotiate their labor contracts with the UAW, renegotiate its dealer contracts, and sell of large portions of their real estate holdings. "

Negotiating with the union won't work. The union will make a piecemeal offer that in no way will put them in the black. 2.5% off 75k labor salaries or something equally silly. Both sides will congratulate themselves for finding a compromise and next quarter's losses will completely erase the saved gains.

"This can only happen if they go into bankruptcy protection, but if they go into bankruptcy protection, they will be swallowing a "poison pill."

No there is another option for dealing with the unions.

Break them.

Set unskilled labor at 45k a year and tell them that scabs will be hired if the union strikes.

The public already has a negative view of the UAW and rightly so. Scab labor is legal and the way to get back at the unions when they go too far.

[ResidentCynic]

I'm inclined to agree, but the roots of the auto industry are so deep that it'd cause an unpredictable chain reaction clusterfuck to the creditors that don't get paid (not to mention the people laid off).

Perhaps some sort of loan with a moderate interest rate to be paid back over several years is best(I think Chrysler had this a long time ago).

[rightwingnut]

Someone has to take away the 'punch bowl' sooner than later....and the hangover is going to get worse the longer the party goes one.

At this point even 'rehab'(re-financing) seems like a waste.

Loan now, fail later...Soup line later or soup line now, either way its coming to a mid-west town near you!

The UAW should be so proud of themselves. They really showed those bastards in management!

[Peter]

"No there is another option for dealing with the unions.
Break them.
Set unskilled labor at 45k a year and tell them that scabs will be hired if the union strikes."

Current pay levels aren't the crippling issue for the Big Three. The foreign automakers with plants in America pay their non-unionized workers around the same. What's really hitting GM, Ford and Chrysler are the "legacy costs," pensions and retiree health care to be specific. Bankruptcy or special federal legislation is the only way out from these costs.

[slwerner]

I heard an interview with some “expert” (missed the beginning, so I don’t know about the persons credentials/qualifications) on the radio this morning, during which, this person claimed to have reviewed the bill (actual legislation pending in Congress, from what I could gather) and stated that it called for loans, not free money, from the monies already allocated for the so-called financial bail-out. Further, according to this person, this legislation avoided one of the big “Paulson Blunders” by including extensive language on what the companies could do with the money being loaned to them (specifically mentioned was a prohibition on bonuses for executives). It was also mentioned that the suggested loans were for a ten year term, with delayed and low interest.

Can anyone confirm that what this person was saying is true? If so, I’d have considerably less objection to loaning the companies money rather than giving it to them – as it seems that we are now doing for banks and finance companies.

[.net sith]

"Current pay levels aren't the crippling issue for the Big Three. The foreign automakers with plants in America pay their non-unionized workers around the same."

Where did you read that? NYTimes?

The average UAW worker makes more than the average professor.
http://mjperry.blogspot.com/2007/07/uaw-pricing-themselves-out-of-market.html

[kurt9]

The people who argue against bankruptcy seem to not understand the basic reality that there is no such thing as an indispensable institution. So what if GM is liquidated? New companies will step in to fill the market void. Same thing with Wall Street. If the existing firms are allowed to fail, new firms will step in or will be created by entrepreneurs to fill the void.

If the Big-3 are allowed to fail, the transplant factories will certainly pick up the slack. Also, is it not likely that there will be opportunities for entrepreneurs to start new car companies?

Eclipse Jets is a start up that is manufacturing jet airplanes. If start-ups can make jets, there is no reason why there cannot be start-ups to make cars. Certainly car manufacturing cannot be any more complex or difficult than manufacturing jet planes.

Free market capitalism is inherently dynamic. Old institutions die and new institutions form all the time. There is absolutely no reason for any existing institution to be protected from this dynamic process. Bailouts and protections of existing institutions prevent this dynamic process from occurring and thus creates further problems down the road.

Attempts to protect or bailout existing institutions is economic parasitism, nothing more.

BTW, the New Republic article is the typical horse pucky written by the kind of journalists who believe in this kind of parasitism. It is utterly groundless. Of course, the New Republic discredited itself on bogus reporting 2-3 years ago.