Last week, after considering GM’s arguments for why it can’t go into Chapter 11, I wrote:
GM is headed for bankruptcy without government intervention. So any government intervention ought to be structured like a bankruptcy: Current shareholders wiped out (they’re almost there already), debt converted to equity, top management out. We could just, for the sake of not scaring car buyers, call it something else. “Government-arranged workout”? “Bailoutruptcy”? “GMerdämmerung”? “Economic stimulus”?
Sadly, none of those names–except “economic stimulus,” which doesn’t really count–has caught on. (I’m especially distraught about GMerdämmerung. First Fanniefredderung fails to make it to the big-time, and now this. I’ve had it with this country’s anti-Wagner bias!) The concept, though, is everywhere. A lot of people are calling it “conservatorship”, which is the state in which Fannie Mae and Freddie Mac currently find themselves. This would resolve two of GM’s three concerns about Chapter 11–that it’s currently almost impossible to get the debtor-in-possession (DIP) financing needed to keep bankrupt companies going as they reorganize, and that the taint of bankruptcy would scare buyers away from GM cars. In a conservatorship, taxpayers would provide the DIP financing, and you and I would presumably keep blithely buying Chevy Cobalts. Right? (I’ve rented a few Cobalts from Hertz over the past year, and I actually kinda like them. But I’m not in the market for a car.)
Those are the easy parts. The whole point of Chapter 11 is to allow a company to break contracts–with creditors, with employees, with suppliers, with retailers–and renegotiate them under the supervision of a bankruptcy judge. Some GM executives have said that the company doesn’t need this because it has already dealt with the legacy costs and overcapacity that usually drive companies into bankruptcy. I think that’s nonsense. Yes, the company has set aside billions over the past decade to cover pensions, it’s about to offload retiree health care to the UAW, and it has shut down some auto plants. But it did all this with borrowed money, and those debts are now weighing down its balance sheet.
Another decade or so of low gas prices and no recessions might have allowed GM to outrun its debts. But instead of a decade of low gas prices and no recessions, we got this decade. And so, to have much chance of surviving, GM probably needs to break some of its contracts with creditors, with employees, with suppliers, with retailers. It’s probably the creditors, who gambled along with management that the company could sell enough SUVs to pay off all its legacy debts, who will need to take the biggest hit. And if it’s not a bankruptcy judge administering that hit, somebody else in government will have to do it. (Felix Salmon has more on this.) The problem is that, right now, nobody in Washington wants the job. After January 20 somebody will, but it’s possible GM won’t make it that long.