How Can GM Avoid Bankruptcy?

With the Big 3 back in Washington, it seems like time to resuscitate the debate over the auto industry bailout. Luckily, Felix Salmon took the time to look through GM’s bankruptcy plan, which is being advertised on GM’s new, also gag-inducing GM Facts and Fiction website. Here’s one particularly gag-worthy claim from the plan:

GM has never failed to meet a Congressional mandate in the important areas of fuel efficiency and vehicle emissions, and sets the industry standard for “green” manufacturing methods.

Let’s not mention that GM has fought increased fuel efficiency standards with every dollar it could spend on lobbyists for decades.

Anyway, Salmon’s post focuses on one issue that has troubled me as well. One of GM’s biggest problems, along with plummeting demand for cars, is $62 billion in debt. In order to become a financially viable company, they have to reduce this debt, presumably by converting some of it into equity. But that debt is held by private entities, and no amount of pleading from the Big 3, the UAW, Jennifer Granholm, Congress, or Barack Obama HIMSELF can force them to restructure the debt. My worry is that in negotiations of this sort, where each side is holding a gun to the head of the other, debtholders could very well say: “Go ahead, go bankrupt, we’ll take our chances that we can get a better deal from a bankruptcy court or, worst case, we can recover more in cash than the value of the equity you’re offering today.” One of the points of a bankruptcy is to get a court that can force bondholders to accept a settlement rather than relying on their good graces.

On a related subject, a lot of people are throwing around the 80% number: supposedly, 80% of people will not buy a car from a company in bankruptcy. A GM spokesman said (to Felix Salmon) that GM’s sales were already falling because of fears about bankruptcy. Maybe. But I strongly suspect that 80% is just a poorly worded and interpreted poll question. If you ask people in the abstract if they would buy cars from a bankrupt car company, of course they will say no. But in the real world, if the car they want is made by a bankrupt company, and they get a good deal, they will buy it. Just look at the November auto sales. GM was down 41%; Toyota, Honda, and Nissan were down 34%, 32%, and 42%, respectively. And everyone buying a car in November must have been aware that bankruptcy for GM was a serious possibility. (Besides, haven’t we been talking about a GM bankruptcy on and off for years?) Sure, bankruptcy will hurt sales a little. But 80% is just not credible.

8 responses to “How Can GM Avoid Bankruptcy?

  1. Don’t agree with your extraordianry bias against GM. You are falling for the simple answers. Things are not that clear cut. To say they have fought higher CAFE with every dollar they could muster is simply not true. There is nothing wrong with trying to impact the regulory environment and it is no different from their competitors (yes, including the Japanese). Please raise the discorse beyond the typical left/right coast liberals accusing the rest of the country being ignornant buffons.

  2. Hmmm. I think you can say I am extraordinarily sarcastic at times; extraordinarily biased, no. See my previous posts on the topic, such as this one.

  3. Robert VanDerVelde

    Rather than loan/give the Big Three the bailout dollars, why not just buy cars? Thirtyfour billion would (at $20,000 per car) buy 1.7 million vehicles, and that’s not including a volume buying discount. The cars could be distributed as a new GI Bonus to the families of servicemembers serving overseas, to teachers in low income school districts, and to police and firefighters. Choose the winners by lottery if 1.7 million cars aren’t enough, and give the winners a voucher good for one vehicle.

  4. There is a difference between looming bankruptcy with some expectation that the Government will help out versus actually being in bankruptcy. I suspect that *that* reality *will* heavily influence buyers. Assuming they don’t just liquidate — remind me again how they are supposed to get that DIP loan?

  5. Chrysler should absolutely not be aided. The US cannot support 3 car companies (there is even doubt it can support one). Chrysler is owned by a private equity company that can supply additional capital if required and we should not be subsidizing this company’s bad management decisions. They would like to push their losses onto investor but, believe me, they will never share their excessive profits with anyone.

  6. I vote that Oprah gives them away.

    Maybe we could do the same thing with houses – buy out all the bad mortgages and give them to HUD.

    And correct me if I’m wrong, but isn’t the only real problem with buying a car from a potentially bankrupt company that you couldn’t trust your warrantee? And is that a reasonable fear here?

  7. I really agree with the fact that people will buy the cars, if they get a good deal. The reason that people avoid bankrupt company is that their product cannot have aftersales service. The reasons for bankrupt company are also clear to the public – few sales. So, it is not the case that people would get inferior products. They would get a good car that is no longer being produced. Great article overall.

  8. Appointing a congressional “czar” to run GM strikes me as giving up on our free enterprise system in a big way. Bankruptcy is a much better alternative.