GM Bankruptcy Could Be the Best Solution

General Motors Bankrupt

by Alex Ricciuti
November 14, 2008 12:36 AM
Filed Under: American, Corporate/Financial, General Motors, Industry

Too big to fail seems to be the mantra these days for everyone looking for a handout from the US government.

GM and many others are claiming that if GM is forced into bankruptcy, the whole industry may go down and cause massive harm to America's economic well-being.

The worst-case scenario goes something like this: GM collapses and immediately many of its suppliers fail since they are already in trouble too. Those same suppliers take down Ford production and the industry goes into a chaotic contraction with the loss of thousands of jobs and severely eroding America's manufacturing base.

But some analysts think GM's only course of action is to declare bankruptcy and restructure. And they say that if GM does it right with a good plan, it could be the best bet to save the company and the industry as a whole.

GM is hampered by the legacy costs of its commitments to employee and retiree benefits. Those penions and health-care liabilities can be re-negotiated with unions (and government) only under bankruptcy protection.

Steven Pearlstein at the Washington Post best lays out this particular argument. [see here]

According to Pearlstein, the danger is if GM is forced to declare bankruptcy in a collapse without a plan. Doing so may cause a panic by suppliers and scare consumers away. That could actually precipitate the worst-case scenario that those interested parties are claiming will happen if they do not get a bailout.

No one really knows what will happen if GM fails. Many in the US Congress as well as the incoming Obama administration don't want to see that scenario play out. If GM can survive until Obama is sworn in, they will likely get a bailout along with Ford and Chrysler. But if they go down before the Bush administration reverses course and gives the Detroit 3 the 25 billion dollars, we may just get an answer to that question.

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Comments

Tuner_Mad

November 14, 2008 12:42 AM

All this talk about GM, and I'm still baffed.

eddie

November 14, 2008 1:32 AM

No more bail outs, bankruptcy would be the best way or suddenly everyone is suddenly going to buy cobalts and impalas where nobody was interested before

Wickedated

November 14, 2008 2:12 AM

NO BAILOUT!! Welcome to the business 101 folks- companies without a clear corporate strategy that follows trends in their industry FAIL! Yes, jobs will be lost, but Lutz and all the pensioners won't give a cent outta their pocket to bail out their company. Guess what? Tough luck guys! Other manufacturers will quickly take the piece of pie. Markets always self-balance and those suppliers, IF their properly managed, will adapt and start selling to others. Business is much like nature, some die to fertilize the grounds for another life.

archytype

November 14, 2008 2:57 AM

I am very glad that GM is restructuring itself. But very sad if the company goes under-why couldn't it be Chrysler!

Joe_Limon

November 14, 2008 2:58 AM

I've thought about it a bit more. And I am against the bail out as well. You don't fix anything by throwing money at the problem. GM needs to restructure.

eddie

November 14, 2008 3:51 AM

There are other Domestic car producers BMW, Toyota, Honda, Kia, for example have factories here in the USA and probably make just as many cars in the USA as the Big 3, (Many of the Chevy, Fords are made in Mexico) VW is planning a large plant in the USA soon. But our other car manufacturers are not asking for a handout!

machida

November 14, 2008 6:26 AM

Eddie, do you have any idea how many cars the various domestic and import manufacturers make and sell in the US? GM sells more Chevy Silverados alone than BMW and Kia combined sell of their entire model lines, not just what they make in the US. Add in all the suppliers and dealers and you have an enormous potential job loss that would devastate the US economy far beyond GM or even just the auto industry.

Keep in mind that a bailout is not a free ride. When the feds "bailed out" Chrysler in 1979, there were very strict rules...and it was a LOAN, not a handout. Chrysler paid it back early and the fed made an impressive profit on the loans (a rate said to be better than what organized crime would have offered).

I'm no fan of GM but the US needs its domestic auto industry. Foreign brands having factories here is great, but it's no substitute for having domestic brands. The best thing that could happen is the loans would stipulate that all of the Big Three get their acts together and start building product with the future in mind. It's a huge opportunity to reinvent the domestic car business so it can stop being the laughing stock of the world.

But it needs to happen, or the ripple effect on the economy will mean no one can afford to buy any car, whether it's a South Carolina-built BMW or Alabama-assembled Kia.

And to joe_limon, please remember: It usually *does* cost money to fix things. GM indeed needs to restructure, but they are burning through their cash reserves rapidly. Everyone's sales are down. If we can bail out the predator bankers and stupid people who though they could afford a half-million-dollar house on $60,000/year, we can help save the US auto industry.

Bremen_Koenigsegg

November 14, 2008 7:30 AM

Very well put, Machida.

Motor_Yakuza

November 14, 2008 3:10 PM

VW are really ugly, and GM brands are legendary, they have to be saved one way or another.

Wickedated

November 14, 2008 10:41 AM

Good luck getting rid of the UAW. That was precisely my point. I'm not wishing for GM to go under, I just don't think America should bail it out, sure some people will lose their jobs but it won't be the end of the world. What that means is that there will be plenty of skilled workers available and companies like Toyota wont need to import cars all the way from Japan,they will hire our local workers and manufacture cars right here in America. Tough luck if GM goes under, it's a company ran by people with 1960s mentality, it has no good products to sell and has a out of date corporate strategy, combined with a stronghold from unions and ridiculous pensions. The market will self-balance, I do have a clue about this my friend, the answer is NOT throwing money at it.

gmfan09

November 14, 2008 3:32 PM

Dude it is estimated that if GM goes any that 3 million jobs will disappear. Thats not just some people. toyata is not going to hire 3 million people. And if you think GM has nos good product you really haven't been paying attention lately.

Wickedated

November 14, 2008 10:50 AM

machida- problem is right now we have a guy with 700billion in credit, a blank check and no accountability. The auto industry lobby is working hard in Washington and trying really hard to spook people by saying the effects of GM going under will have disastrous repercussion in our economy. It's the old politics of fear. Don't buy into it. The solution is simple- like any company going under they have to cut costs, declare bankruptcy, streamline their products and rework debt. Throwing money at it is exactly what the fat cats want. You won't see Lutz or pensioners giving up their cut to bail out their own company. It's B.S.

machida

November 14, 2008 4:15 PM

I'm not at all opposed to using bankruptcy and restructuring to make them come back in healthier form. And I agree all the domestic automakers are in their current conundrum largely due to generations of stupid management (both at the companies and the unions). And I'm certainly not in favor of the blank check approach the banking industry just got (and is about to get their leash yanked on).

I'm saying we need a domestic auto industry, and it would be devastating to the entie US and the global economy for it to collapse. You can hardly compare the volume and role of Great Britain's car makers, especially since theirs was a gradual decline over 25-30 years.

Punishing GM, Ford and Chrysler for their stupidity (can we include the Daimler-Benz people who helped gut Chrysler of its talent and momentum?) will only hurt the rest of the country. It's a great opportunity to reinvent the American auto industry.

Maestro

November 14, 2008 2:05 PM

What a way for Obama to start it's administration, eh, guys?

shifty

November 14, 2008 3:00 PM

Im impressed, when it comes to serious problems you guys start a serios debate without hating and stuff. Keep it up! My opinion is that it is rather hard to predict the consequences of either GM going down or a miscarried (is this correct english?)bailout.

Bristol411S3

November 14, 2008 3:45 PM

I don't know what the fuss is about. The UK lost its badly managed indigenous car manufacturer (MG Rover) but continues to make Toyotas, Hondas, BMWs and Nissans (also vans and engines for Renault, GM and Ford) and survive. fact is, no one is buying cars currently; least of all thirsty cars; and especially least of all cars that are not competitive. I agree these are exceptional times for most car manufacturers, but companies like GM, Ford and Chrysler have a stack of problems that even when times were good they did little to attempt to resolve. Now the chickens have come home to roost.

eddie

November 14, 2008 5:15 PM

It sounds like a majority of our retail stores are running short of cash....should we have a retail store bailout also...look at all the jobs that could be lost!

eddie

November 14, 2008 5:22 PM

We should be forming a alternative energy Work Program Admin(WPA)to supply new future jobs in the USA(solar, geothermal, natural gas cars(like honda), wind,biofuels etc. and not continue our dependence on the bad guys for oil. 20mpg hybrid Escalades are not going to save the planet.

Viking79

November 15, 2008 4:07 AM

I need somebody to explain something to me. One of the most popular attacks against Obama during the run up to the election is that he was a "socialist", and that he would threaten the very fibre of the American being - capitalism (you succeed; you make money. you fail; you don't). Isn't bailing out industies the very opposite of capitalism? and isn't (largely) the same people reccommending the bail out the very same who said that Obama showed Marxist/communist leanings?

ATTESA45

November 15, 2008 5:10 AM

Thanks good. Less crap on the roads

9TNine

November 15, 2008 3:59 PM

GM should hand over power to its European operations. They can at last build decent cars. Because if you cannot build reliable, decent cars in the market place and beat the Japanese manufacturers (as they do in Europe), you'll end up in a mess you're in now, only to be repaeated time and time again when the economy goes bad for whatever reason...

... and then only for GM to be on "welfare" when that happens.

sirgeek

November 16, 2008 8:19 AM

9TNine - you raise what I think is the key point here - that in Europe, Europeans continue to prop up their auto industry, motivated by their indigenous media and a healthy desire to have their own companies succeed. Meanwhile, here in America, we seem to think it better to punish our auto companies for sins of the past, ignoring the fact that Ford and GM make fully competitive cars and trucks (yes, there are people who truly need trucks). Apparently, these folks (traditional media and bloggers alike) take pride in the notion that they are "objective enough" to criticize American companies. This criticism was constructive through the 80's and 90's, and has resulted in amazing improvement in the competitiveness of Ford and GM. It's time to take stock of this improvement, and make the decision (all of us) to support our own companies through these difficult time - believe me, it's no longer a sacrifice, and will pay significant dividends in the long run. I hope to be able to revel in the profits our indigenous automobile industry bring home from China, Russia, India, South America, etc in the coming decades due to our foresight to keep them above water in this terribly difficult time.

9TNine

November 16, 2008 9:33 PM

Actually the fact is the Euro-arm of Ford / GM does make better mainstream cars than the Japanese manufacturers, IRRESPECTIVE of any local sentiment for their home grown products. For example the Ford Fiesta / GM Corsa; Ford Focus /GM Astra; Ford Mondeo / GM Insignia are pretty much top of their class. They are better cars than any Japanese rival and proof is they sell better too. This netted Ford Europe a half billon profit!!!!

That’s the point I’m making. If the US HO of Ford / GM could repeat this perfomrance in their home market, there wouldn’t be any of these problems. The US market however may have unique problems, like anti-sentiment for their home products… plus redneck management :)

tbrodie

November 16, 2008 10:48 AM

This is a tough one. While I'm not in favor of transferring private debt to the public as we've done in the financial markets, I can understand how the financial sector bailout because of how fear in the international finance world could bring things to a halt.

This seems different. Yes, the new credit environment impacts people’s ability to buy new vehicles, but US manufacturers are at a per unit profit disadvantage due to the legacy UAW agreements. Wouldn't bankruptcy allow GM more leverage in remedying that problem? With 2009 being forecasted as a tough year for vehicle sales, the bailout may only enable the big three to hemorrhage longer.

What degree of certainty do we have that the 2010 model offerings will be so radically different that everyone won’t be able to afford to continue driving what they have? Will the overall economy be moving sufficiently to allow the masses the luxury of replacing their vehicles? I’m for that, but is it realistic?

What's to keep them from needing another bailout in another year? I'm not being rhetorical here, if someone has some inside understanding as to why this wouldn't be the case, I'd enjoy hearing it. I don't think limiting executive salaries or golden parachutes is going to be adequate to remedy the problem.

Then again, Chrysler paid their loans off early in the 1980s. It would be interesting to compare the conditions of Chrysler then with GM's situation now and then look at the differences in the US economy in the mid to late 80s. When Chrysler got their loans, Lee didn't get a salary; he just got stock. I wonder how many GM execs would be willing to do that. (It isn't that uncommon here in Silicon Valley.)

The timing of this seems suspect. Just two months ago, there were mutterings over a GM-Chrysler merger, then we have the $770B bailout, and now we're hearing their piggy banks are too low?

While I mentioned not owning any GM product, I don’t have contempt for them or the other two (i.e., I’m not waving our marques). At this point, having them bailed out wouldn't increase my confidence in their long term viability. While Iraq may cost a billion every four days, a billion here, a billion there, pretty soon you're talking real money! (Sorry, I don’t recall the senator I’m paraphrasing.)

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