November 14, 2008

Isn’t Bankruptcy The Answer?

Many objecting to the prospect of a federal loan to the Big Three suggest that reorganization under Chapter 11 is the answer.  The Big Three have never viewed Chapter 11 as a viable option, and today’s Cleveland Plain Dealer (which also noted that northeast Ohio has 12,805 auto plant jobs, 58,747 auto part supplier jobs, and 11,000 auto dealership jobs, not including any multiplier effect) provides an answer why.  Art Spinella, president of CNW Research in Bradenton, Oregon, a firm that studies auto consumers, noted, “Of those who had a GM product on their shopping list, better than 90% said they would avoid it,” if GM were to file for bankruptcy.  Also, as commenter (and lawyer) Bill Wilder pointed out in the discussion following Scott Richert’s article at Chronicles:

Chapter 11 is no solution (see Delphi.) For one thing, particularly with the current capital markets, there is no way any of the Big Three could raise the Debtor in possession financing (which would easily range in the tens of billions of dollars) necessary to operate in bankruptcy. They also would not be able to raise the further tens of billions needed for exit financing.

As Mr. Piatak (who lawyers in the same field as me, but for the other side) notes, the UAW has already made extensive changes to its collective bargaining agreements with the Big Three (as it also did with Delphi.) The significant cost is health care costs, which the UAW attempted to address with GM (at least) by creating a separate union run fund (a VEBA) with seed money from GM that would take retiree legacy health costs off GM?s books. But now that VEBA is in trouble. Adjustment of these agreements in bankruptcy would not achieve anything ?transformational? in GM?s cost structure.

Finally, as Mr. Piatak points out, there is a reason auto companies don?t go into bankruptcy?they sell durable goods, including with multiyear warranties (and governed by the Magnuson Moss Act, for example.) No one will buy a good intended for multiyear use from a company that could be gone in 6, 12 or 18 months. Bankruptcy for any of the Big Three would mean effective liquidation (both for the impracticality of financing and the realities of the industry.)

As for the blather from purported ?libertarians?, all they demonstrate is (again) that they are ideologues. ?How the market is supposed to work??indeed. Any one who cannot understand the notion that our automobile industry underpins our manufacturing sector should be restricted to the classroom, where no damage can be done.


Subscribe to Taki’s Magazine for an ad-free experience and help us stand against political correctness.


Sign Up to Receive Our Latest Updates!


Daily updates with TM’s latest