To Bail or Not To Bail, GM Edition

For those who can’t get enough of the GM topic, Economix (NYT) has links to posts for and against bankruptcy. Right now it’s 10-5 in favor of bankruptcy, although I’m not sure that Mitt Romney’s vote should have the same weight as those of, say, Martin Feldstein, Gary Becker, and Paul Krugman.

However, the bankruptcy/bailout dichotomy leaves out what I think is the best solution: a government-brokered reorganization, which may or may not require bankruptcy – a prepackaged bankruptcy, as it’s sometimes called. This would be very different than just letting GM go into Chapter 11 and hoping for the best, especially given the lack of debtor-in-possession financing these days (thanks to the commenters who pointed this out). Andrew Ross Sorkin, for example, argues for a prepackaged bankruptcy, and even Romney calls for a “managed bankruptcy” (without many deatils) – yet they are lumped in with the the others, like George Will, who argue against any government intervention. (See the link above for all the links to individual posts.) So I don’t think 10-5 is a very accurate count.

Update: Five professors who really are experts on the auto industry (and one of whom is a colleague of Simon at Sloan) have a highly readable paper with their proposal out. They favor a non-bankruptcy restructuring plan that is overseen by the government and also has some provisions to ensure that the reorganization is in the public interest, such as increased fuel efficiency standards and a prohibition on paying dividends to shareholders.

6 thoughts on “To Bail or Not To Bail, GM Edition

  1. Do not bail out the auto industry, let them claim bankruptcy like all other business have to do. They need to cut back on high wages, executive bonus, etc. Airplanes, Party and entertainment. Company cars and all the frills.

  2. Will consumers really be willing to buy a car from GM if they are bankrupt? Even if it is managed? I know you think so, but there is a difference between concerns about it earlier this year and actually being bankrupt. Not to mention that almost everyone would know about it as opposed to concerns about viability (e.g. like Chrysler several months ago). Additionally, what happens to the value of currently owned GM vehicles? Odds are they will not be worth as much. A manufacturer going bankrupt is very different from a company providing a service, yet most people seem to be treating the potential GM bankruptcy the same way. And what about the suppliers who are also already hurting? If GM goings into a prepackaged bankruptcy will they still survive? What about states running out of money because so many people are filing for unemployment insurance? Disclaimer: comments are my own.

  3. How about Congress/Obama structure the Detroit pre-packaged bankruptcy to require the banks that got tax dollars from TARP to participate by loaning money to GM, Ford and Chrysler? That way, the banks have skin in the game too, we are leveraging our TARP dollars, and we are requiring the banks to invest the money in measurable progress, rebuilding the economy, instead of letting them fritter away the dollars on buying up competitors and paying for golf trips?

  4. Alternatively, how about each taxpayer in the US gets 100,000 or 200,000 from TARP? I’ll bet we know what to do with the money. We’ll pay off the credit cards, pay down the mortgages, buy cars with cash. You want economic stimulus? That will do it in a blink. Suddenly, Detroit won’t have enough cars to deliver. Suddenly, the mortgage crisis will be on its way to solved. Suddenly, banks will be liquid again, with money to loan, solving the credit crisis, at least in part. Every dollar invested in an American taxpayer, instead of executive perks and corporate jets, is going to get turned around two or three or more times within 30 or 60 or 90 days to put Americans back to work, to fix the broken economy.

  5. It’s not a crazy idea: Giving money to people does (a) stimulate the economy and (b) indirectly support consumer asset-backed securities. But $700 billion is only about $2,300 per person. We gave tax rebate checks to households earlier this year and all they did was give us a one-time bump in spending; a lot of the money probably got saved, but it didn’t do much to support mortgage-backed securities.

  6. The Detroit 3 auto manufacturers represent the single highest leverage industry for creating economic activity in the US. The auto industry is one entity that can actually power the economy out of the recession. The govenment should provide consumers with a $3,000 incentive to buy a vehicle from the Detroit 3 as long as the manufacturer provides a minimum $3,000 incentive. This level of incentive would be unprecedented and would certainly stimulate demand. The Detroit 3 could quickly provide this demand very quickly without any lag and create jobs across the US at suppliers, dealers, services, commodities, etc, etc. The economic engine would be primed and begin to work again.

    When terrorists attacked the US on 9/11, the US economy came to a virtual standstill within hours. To GM’s credit, they created a “Keep America Rolling” campaign consisting of roughly a $3,500/vehicle incentive. The rest of the industry responded similarly and within days the industry volume exploded from roughly a 16M unit annual rate to nearly 22M for the month of October, 2001…which is how long the campaign lasted.

    The US government needs to save it’s auto industry and use it to power the rest of the economy out of the recession.

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