Ask google he's your friend http://blogs.wsj.com/deals/2009/02/20/deal-journal-qa-why-not-a-general-motors-bankruptcy/ The Great Benefits of a General Motors Bankruptcy As General Motors passes around an ever-larger tin cup to Washington lawmakers, people are increasingly pondering the nuclear option: letting GM file to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Associated Press Mark Roe, the David Berg Professor of Law at Harvard Law School, thinks it is a route that looks more and more sensible. In many ways, the worst-case scenarios already are playing out: The auto makerâs struggles drag on publicly, it is asking for another $14 billion from Washington in a move that would increase its debt to $90 billion, and one of the brands it wants to cut loose, Saab, has filed for bankruptcy. Deal Journal talked with Roe about what a GM bankruptcy would look like. Deal Journal: Why is bankruptcy for GM a good idea? Mark Roe: There are three issues that GM cited as reasons to avoid bankruptcy. One is the idea is that consumers wouldnât buy from a company in Chapter 11, two is the report that the bondholder negotiation is already difficult, and the third is that that the supply chain would be affected as suppliers filed for bankruptcy. DJ: Letâs take those one by one. Roe: The first is that consumers wonât buy. The idea that GM keeps repeating is that if a company is in bankruptcy, consumers would be reluctant to buy products from them. But that would mean that consumers who want to buy from an American company would buy from Ford, which is not dealing with the same problems. Thatâs not a bad competitive result. Ford as an intact auto maker would be a principal beneficiary of GMâs distress. Second is that if GM keeps tottering on the edge of bankruptcy for the next year and keeps coming back to Washington for a loan, there will be consumer aversion. DJ: How do you mean? Roe: GM is advertising itself, maybe not intentionally, by going to Washington to ask for money. Every time thereâs a headline about thatâwell, if consumers are worried about buying from a bankrupt GM, they have to be worried about buying from GM today. So they need a resolution of the situation to keep from generating these bad headlines. DJ: And how does that work? Roe: Hereâs one resolution: GM files for chapter 11. The company puts together the automotive operations, and leaves behind the legacy obligations to retired workers and the bond obligations. It takes the auto operations and sells them intact. Section 363 of the Bankruptcy Code provides for these kinds of sales. This would leave behind restructuring the bond debt and the legacy claims. Whatever GM gets from the automotive sale will go to pay off the bonds and pay off the legacy claims. That part is in some ways straightforward. If it can be completed, consumers would be looking at a viable GM that has exited bankruptcy. Then the claimsâthe legacy claims and the likeâwill be resolved. Of course, anybody buying GMâs operations needs to know what kind of arrangements there are going to be with the UAW, management and any buyer. So GM could leave behind the legacy claims and a buyer wouldnât care what the value of those would be because that would be resolved in a bankruptcy. But the buyer does need to know what the arrangement would be with UAW. A bankruptcy doesnât get GM out of having to deal with the United Auto Workers union. Thereâs frequently talk that bankruptcy would allow GM to get out of the contract. It doesnât. It still has to persuade the UAW. DJ: But thereâs a kind of psychic overhang, too. GM is an American icon of sorts. If it files for bankruptcy and still hasnât resolved the UAW contracts, critics will imply that the unions pushed GM into bankruptcy. Roe: The union doesnât want GM to go into bankruptcy, and management doesnât want that either. They both want financing to come from Washington. Their interests are aligned in getting financing from Washington. Management has anther motivation to avoid bankruptcy: they donât want restructuring experts coming in and pushing them out. DJ: So how does a GM bankruptcy benefit the communities, financing companies and suppliers that depend on the auto maker? Roe: The picture GMâs been painting is that if it goes into Chapter 11, it closes up and affects the supply chain. But there are more factors protecting GM in Chapter 11 than outside Chapter 11. There are two features of the bankruptcy process that protect them: bankruptcy judges know you canât run a manufacturing company without inventory, supply and the like. New inventory supplies to GM actually go to the top of the queue in getting repaid. The idea is that bankruptcy judges know that they have to get sheet metal to hammer into car bodies, or else the company dies. So these get priorities in payment. DJ: Doesnât that pit the suppliers against themselves? Roe: It pits the new suppliers against the old suppliers, and sometimes they can be the same companies. Thereâs something called the critical vendor doctrine, so that if thereâs an outstanding debt to an old supplier thatâs critical to the companyâs survival, the judge can order payment to the old supplier. If someone is delivering a crucial shipment and it canât be paid before the shipment, the judge can require that to be paid. DJ: What about the complaint that a GM bankruptcy is long and expensive? Roe: Bankruptcy can be long, but this process of bailing GM through handouts out may be longer. Thereâs no reason why the bankruptcy process has to be any longer than the restructuring process, and if GM can effectively go through this first plan I was talking aboutâtaking the operations and selling them in a 363 saleâit can leave behind its operational problems, so it can get the operational part freed from its legacy obligations and itâs at least possible that the legacy process can be faster than the restructuring process by allowing chapter 11 to separate out the operations from the old financial obligations. Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Great summary, but I come to a different conclusion than the law professor. I find it hard to believe that anyone would pay much for GM in Chapter 11 knowing they would pick up the UAW contract. The analogy would be all the great deals on houses available in detroit. You can actually buy what was at one time a pretty nice house for next to nothing, but then you have to deal with high taxes, crime and the Zimbabwe-style city government. Someone might be willing to buy the name, the designs and a few of the factories in non-union locations, eg texas and mexico. Building trucks, maybe Caddies, in those plants would probably be a decent business. The rest? Not so much. The Japanese proved that you can build plants here, train non-union workers in the south and produce extremely high quality product. Why would anyone want to do it the hard, ie UAW, way?
Let's see. The union members would find something productive to do with their time and the Union bosses will stop collecting mandatory payments, which are now made by taxpayers. The biggest losers will be the Union bosses as unions mostly work for the bosses and not so much for labour. The union members will be no less unemployed than they are now. Since they are working for a company that doesn't generate enough income to pay them, they are essentially on the government dole right now - at $73/hour. Making them officially unemployed would be cheaper for taxpayers.
What Happens? An immediate jump to double digit unemployment, followed by unemployment of 25% by summer. What's left of the steel industry collapses. Thousands of small businesses, everything from small fab shops to the diner down the street go under by summer. By the dog days of summer we'll see civil unrest that will make 1968 look like a day in the park. Whatever your political position, whatever your financial status, you, your family and friends, will see the world change forever. Other than that, it'll be business as usual on capital hill.
This is chapter 11, the firm is reorganized, and creditors are paid off or put into payment plans. If the UAW doesnt play ball then you Chapter 7, pure liquidation, which would be catastrophic for UAW as the would be a disorderly process imploding the Auto industry in the U.s thereby guaranteeing no pensions and no jobs, ever for us autoworkers.
Time to shutter GM. It is not really a business when it needs Billions to be propped up. Yes, there will be huge joblosses, but it's an unsustainable business model where people with high school degrees are making $50+ per hour. If this was any other industry, no one would even care. UAW, they got what they deserve, the fat pig gets slaughtered...in this case, a lazy one too. Just sell Ford the Corvette and the Cadillac line, and punt the rest.