GM is mounting a massive PR campaign to convince Washington that a GM bankruptcy would be catastrophic to the national economy, resulting in the loss of millions of jobs, costing taxpayers over $100 billion, and plunging the economy into a depression (whatever that is). In addition to Nancy Pelosi and Harry Reed, Barack Obama has now called for an auto bailout.
I don’t want the US auto industry to go away. Yes, if GM and every one of its suppliers and dealers stopped operating tomorrow, that would cost hundreds of thousands or millions of jobs. But it’s not clear to me why bankruptcy would have the same effect. Ordinarily, when a company goes bankrupt – especially a big one – it goes right along doing whatever it was doing before, except now it doesn’t have to pay off all its creditors, and its operations are monitored by a court. The bankruptcy process is intended to find a reasonable outcome for all of the stakeholders that reflects the order of priority of their claims, but also (in the case of a company as big as GM) reflects the public interest. Airlines, for example, have been going in and out of bankruptcy for years in order to force their unions to negotiate long-term cost reductions, and even use the threat of bankruptcy as a negotiating tool.
If GM were to go bankrupt, one possibility is that it would emerge in a stronger form, perhaps with a lower cost structure and with some of its debt converted into equity. Another possibility is that it would be broken up and sold to other companies, both domestic and foreign, who would continue doing most of what GM does today. In any case, it is likely that shareholders would get nothing (but they’ve already lost most of what they put in), management would be fired, and workers would lose something (through job cuts or reduced pay or benefits), but the nightmare scenario that GM is trying to scare us with would not occur.
Now, I have heard vague claims from the auto industry that GM cannot operate in bankruptcy, but I fail to see why not. The only reason I can think of is that consumers might be hesitant to buy a car from a bankrupt company (warranty concerns?), but for years consumers have been buying cars from companies that are at serious risk of bankruptcy, so I don’t really buy that. What am I missing? I mean that seriously: if you know the answer, please let me know.
The other alternative would be a government bailout that has the same salutary effect as bankruptcy: wipe out the shareholders, replace the management, write down the debt, add new capital, lower the cost structure, preserve most though probably not all of the jobs, and ensure the new entity is profitable as a going concern. The government holds all the cards right now and should not be afraid to negotiate such a deal. Under this option and under bankruptcy ordinary shares will become worthless – which, arguably, they should – which is why Deutsche Bank just reduced its price target for GM to $0.
The one thing I would not understand is a no-strings-attached $25 billion loan to the automakers that does nothing to address their long-term problems. But help me out if you can explain what I am missing.