Orderly bankruptcy? For carmakers, that's an oxymoron.

Posted by: David Welch on December 18, 2008

Ronald Reagan once said that the nine most terrifying words in the English language are, “I’m from the government and I’m here to help.” Detroit’s CEOs and UAW President Ronald Gettelfinger night recall that now-famous line as the Bush Administration and Treasury Department have talked about an “orderly bankruptcy” as a means to “help” them through the financial crisis.

The Administration hasn’t exactly explained “orderly bankruptcy.” But I’ll say again that bankruptcy simply isn’t the way to go for these car companies. (Cue up the readers who hate Detroit’s cars or loathe unions. No matter what I write from here on out, they’ll say I don’t know what I’m talking about) But here are the reasons for anyone who is interested enough to dig beyond the emotional or politicized arguments of television pundits.

A pre-packaged bankruptcy—which has the government, management, creditors, union and dealers negotiating concessions before filing Chapter 11—will still cost tax payers billions. That’s because all of the proposals out there call for the government to provide debtor-in-possession financing. Since the banks who took Henry Paulson’s $335 billion won’t lend that money, you the taxpayer will. And if the car companies are right and consumers won’t buy Chrysler or General Motors cars after they go bankrupt, just flush that money. It’ll be about as recoverable as the savings and loan bailout money was. If they’re right, revenue will fall so fast that even “Neutron” Jack Welch couldn’t restructure fast enough to turn a profit.

Here’s another myth. GM can just file for bankruptcy protection and, “bang” goes the gavel, gone is the labor contract. I asked Delphi Corp. Executive Chairman Steve Miller about that. He has taken several companies into Chapter 11, including Delphi. Miller says that you can only attempt to tear up the labor contract after restructuring the debt and then proving to the judge that more cuts are needed. Even then, Miller says, the judge will try to get the two sides to negotiate a deal. The results are rarely ‘orderly’ and companies often can’t just toss out retiree benefits. Everyone still gets a voice in court and the bargaining can take years.

But at least GM and Chrysler could kill of brands without having to buy off dealers. Well, maybe not. I have heard from a couple of bankruptcy experts who have said that there are laws in some states that still force even bankrupt companies to work out such problems in state court where those local business laws were written and enforced. In other words, killing off, say, Saturn, Saab, Pontiac, Hummer and Chrysler’s namesake brand may not be just a whack of the gavel in federal bankruptcy court. Deals may still have to be cut at the state level. That’s more negotiating and possibly settlements. As an aside, some Republicans love the idea of sending Detroit into bankruptcy. They also love state’s rights. They may want to ponder the irony that one of their hobby horses could be trampling the other.

Unless there’s another way to make all of this orderly, it doesn’t make much sense. And it seems unnecessary since the government has the leverage to get creditors and the union to make concessions outside of court. It’s simple. They give Detroit the money to survive the next couple of months. And then the government holds any more cash until all of the stakeholders cut deals that make the companies viable. If they don’t, the companies collapse and no one gets paid. That sounds more orderly to me.

Reader Comments

Paul (Vw)

December 18, 2008 9:29 PM

>>> The Administration hasn’t exactly explained “orderly bankruptcy.” But I’ll say again that bankruptcy simply isn’t the way to go for these car companies. (Cue up the readers who hate Detroit’s cars or loathe unions. No matter what I write from here on out, they’ll say I don’t know what I’m talking about)

Love? Hate? More like simply disagree. Quite the cerebral rejoinder there.

>>> "exactly explained"

I'd like to have it "exactly explained" just why Chapter 11 is out of the question.

Huh? We're supposed to dump billions on billions of dollars into a black hole without any discussion of restructuring (aka union concessions)...but the best that can be done is accuse those who disagree of "hate"?

Paul (Vw)

December 18, 2008 11:58 PM

The Spongebob character Squidward once said, "...you can't fool me. I listen to public radio." So do I. I happened to catch Mr. Welch on Minnesota Public Radio just a few days ago...

http://minnesota.publicradio.org/display/web/2008/12/15/midmorning1/

Scan to the point in time of 38:22

>>> There's a lot of dislike for the unions. And not just among southern republican senators. There's an old...90's alternative tune..."We hate it when our friends are successful"... And you know a lot of the email I get about the UAW sort of mirrors that...people are furious that you know somebody gets paid $29 an hour with terrific benefits to put a car together and they say, "Well if they didn't make all that money and such great benefits...

I hope Mr. Welch doesn't think all people who disagree with a bad bailout (without the necessary restructuring to become viable) are guilty of "hat[ing] it when our friends are successful"

David Welch

December 19, 2008 12:00 PM

David Welch with BusinessWeek here. Paul (Vw) weighs in with his predictable rant that the bailout is “bad.” That’s fine. I don’t mind a difference of opinion. That’s what this forum is for. What I do mind is when a person repeatedly says that I have not explained my point about why bankruptcy won’t work and why a properly-structured bailout will. It’s clearly explained in the post with all of the legal ins-and-outs that make Chapter 11 such a burdensome and risky proposition. The story also explains how Congress and the White House can accomplish the needed restructuring without bankruptcy, and they can get it done faster.

In fact, that is what President Bush and Treasury Secretary Paulson announced today. Their plan that mandates a restructuring of debt and labor costs that will be enforced by the government’s check book. Sound familiar? It should. I have written that several times including in this blog post.

You won’t see Paul (Vw) acknowledge that because he simply dislikes the idea of loaning money to U.S. carmakers. That opinion is fine. But don’t tell me that the argument hasn’t been made. The current bailout plan that I have advocated accomplishes what a Chapter 11 would. That Ch. 11, by the way, would still require taxpayers’ money to be loaned out. And probably more of it sine bankruptcy court requires a long legal procedure. While the lawyers work through the court’s process, you the taxpayer will loan out the money to keep the companies afloat.

Paul (Vw)

December 19, 2008 2:28 PM

>>> It’s clearly explained in the post with all of the legal ins-and-outs that make Chapter 11 such a burdensome and risky proposition.

I stand corrected. :-)

And I'm not entirely against loaning money to US car makers, I'm against providing any taxpayers money until *after* the Detroit/UAW makes concessions/restructuring such as were sought in the senate recently. So yes, any money given absent that is "bad" to me.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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