March 11, 2009
By Andrew M. Grossman
The time has come to stop the fear-mongering and face facts:
General Motors and Chrysler are racing fast toward insolvency and
That's not a bad thing. Bankruptcy is better than the
alternative, another government bailout, which two auto task force
advisers to Treasury Secretary Tim Geithner were evaluating Monday
in a visit to Detroit.
There was an argument to be made in October and November that
the companies were unprepared for a filing and that the results
could have been catastrophic. After months of planning and laying
the groundwork, that's no longer the case.
An orderly Bankruptcy promises protection and power. From the
moment of filing, a company receives protection from its debts,
giving it room to reorganize. It then has the power, which it lacks
outside of Bankruptcy, to reduce its debts, modify its contractual
obligations and force stakeholders to accept reasonable and
GM in particular has had a tough time convincing its creditors
to exchange debt for stock in the company. In Bankruptcy, however,
it can cram down certain kinds of debts over creditors' objections
and force creditors to take a stake in its future.
Compare that with the experience of GMAC, GM's finance arm. Even
with billions of government dollars at stake, it couldn't persuade
some of its biggest creditors to make a deal. That's exactly the
situation that GM is in today.
labor concessions are also needed. While the United Auto Workers
has agreed to incremental give-backs, it's been unwilling to accept
bigger pay cuts that put labor costs in line with foreign
competitors'. And nobody has been brave enough to put the
industry's stifling, phone-book-thick work rules on the table.
That changes in a Chapter 11 reorganization. The law gives the
Bankruptcy judge the power to make changes that are necessary to
achieve viability. That might include scrapping plant-level work
rules in favor of the more flexible approach taken at New United
Motor Manufacturing, a Toyota and GM joint venture in California
that regularly wins awards for its innovation and productivity.
A similar section of the law allows changes to retiree
Bankruptcy also provides the tools for an automaker to shut
underperforming brands and rapidly shrink its dealer network.
Outside of Bankruptcy, state-level laws make these changes
expensive and time-consuming. Shuttering Oldsmobile, the most
recent example, cost GM more than $1 billion and took more than
four years, from start to finish (not counting the dealer lawsuits
that are still pending).
Within Chapter 11, those state laws lose their bite. At the
least, GM could sell or turn out the lights on Saturn and Pontiac
-- something the automaker considered in its February restructuring
plan that targeted Saturn for gradual elimination and Pontiac for
shrinking. Both GM and Chrysler could focus their sales operations
on the most profitable dealers, saving billions of dollars in
marketing and logistics while improving customer experience.
Against all these benefits, the objections to using Bankruptcy
to revitalize the industry are weak. The chief, voiced often by GM
officials, is that sales would collapse because consumers wouldn't
purchase cars from a bankrupt company. It's hard to take this claim
seriously, considering how much those officials have already done
to convince the nation of their company's dire finances. If
anything, savvy consumers would see Bankruptcy as a serious step --
more so than begging for government dollars -- toward long-term
Further, consumers have shown little reluctance to deal with
other companies going through reorganization in Bankruptcy --
including most of the big airlines, even though some commentators
predicted consumers wouldn't trust them to maintain safety. And the
automakers could take steps to provide further assurance, like
providing third-party warranties and (following Ford's lead)
setting clear milestones for reorganization and sticking to
The other big objection is that the parts network would
collapse, damaging the entire industry. But there's no reason to
believe the Bankruptcy judge wouldn't move fast to make sure
suppliers get paid and remain in business.
In its own way, GM acknowledges that Bankruptcy is workable and
has real promise. Its latest turnaround plan concedes the company
could get through the process in a few months and achieve tens of
billions in savings, but rejects the option on the assumption that
sales would dive. Tone down that assumption, and the numbers come
out strongly on the other side.
The real reason GM and Chrysler want to stay out of Chapter 11
is that it would force them to make real, disruptive changes --
especially, perhaps, in the executive suites. And Cerberus, the
private-equity behemoth that owns Chrysler, would see its stake
diluted or wiped out.
Those whose chief concern is the future of the U.S. auto
industry shouldn't share the executives' trepidation. Bankruptcy
may be the industry's best bet for revitalization and long-term
sustainability. And it may happen whether the executives welcome it
Grossman is Senior Legal Policy Analyst in the Center for
Legal and Judicial Studies at The Heritage Foundation.
First appeared in The Detroit News
The time has come to stop the fear-mongering and face facts: General Motors and Chrysler are racing fast toward insolvency and bankruptcy filings.
Andrew M. Grossman
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