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What Would A GM Bankruptcy Mean?

Jim Manzi at The Corner on National Review Online makes a critically important observation about whether or not it is fair to bail out or allow bankruptcy to ensue.

Is this fair to the people who work at GM and will now have a deal changed after the fact? Well, when people sold parts to GM on credit, or employees (individually or via union negotiations) entered into labor contracts with GM, they undertook counterparty risk. That is, they were taking, in part, a bet about whether GM would actually be able to pay them what they are owed. This is also true for pension payments, which are simply deferred compensation, as much as it is for deferred payments on credit terms for parts. To act now as if they should be protected from this risk is to treat them as children.

Read it all for full constext, but that paragraph hits at the heart of the (free market) matter and warranted repeating here.


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Comments (23)

There's a potential for set... (Below threshold)
_Mike_:

There's a potential for setting a dangerous precedent here too. Once your company becomes 'too big to permit it to fail', you can then become more aggressive in the risks you take - because should things go bad, you know the government will bail you out.

A bailout of GM would simply encourage companies to take on more risk and result in more failures in the future.

It's the old too big to let... (Below threshold)
Mac Lorry:

It's the old too big to let fail problem. In this case, it's an industry, or more specifically the American part of the industry. The root cause of the problem is the huge overhead of labor that's unique to American auto makers. It's not just the wages, but the pensions and fringe benefits.

If GM went into bankruptcy it would likely get new top management, but also some relief from labor costs and pensions. The democrats can't allow one of their most loyal groups, union labor, to take that hit, so you can expect tax dollars to flow freely to the American auto industry.

Unfortunately, that just means the fundamental problems won't get fixed, and if the economy doesn't quickly recover, neither will American auto makers. At some point the democrats will have to cut off the supply of tax dollars to the American auto makers, and if that forces them into bankruptcy, taxpayers may lose most of it.

As a capitalist I fail to u... (Below threshold)
hyperbolist:

As a capitalist I fail to understand the problem with wiping out a) management; b) labour; or c) stockholders. Anybody crying about their 401k or pension should have paid more attention to the state of the industry on which they staked their financial future.

And I'm not saying throw them out on the street--they can take advantage of safety nets until they find other work, or retire if they're able to.

Maybe they will find work in plants being opened by Asian automakers, though probably not at absurd union wage levels. (A positive effect of this economic downturn might very well be the end of the $100,000/yr autoworker, a.k.a. He Who Defied the Principles of Supply and Demand.)

Here is what the government... (Below threshold)
Dee:

Here is what the government needs to: Pre-packaged bankruptcy of GM. The Feds will commit to be the the new creditor/financier of a new GM after it sheds garbage contracts in the bankruptcy process. I think GM hasn't filed BK yet because they do not think they will get creditor financing to come out of Chapter 11 and then that would spell Chapter 7 (end of story).

I don't mind helping companies out but you have to shed the very things that brought you to the brink of disaster. If the government doesn't take GM through a pre-packaged BK, things will get worse for GM and they will ultimately go into Chapter 7. Save the jobs you can now while you can.

<a href="http://money.cnn.c... (Below threshold)
Mac Lorry:

This article has some good info in it, and I think Dee (Post #4) is correct that Congress should guarantee DIP financing for GM if it files bankruptcy. That would give GM the best chance of surviving in the long term.

The theory that GM shouldn't file bankruptcy because 80% of customs won't by a vehicle form a company in bankruptcy seems to be a moot point. Those same 80% are not going to buy from a company that says it will be forced into bankruptcy in a few weeks unless it gets bailed out by government. More likely GM needs a continuous infusion of tax dollars to say in business. Given democrats want to tax business and impose devastation carbon cap and tax legislation, I'm not sure anything can be done to save GM and maybe not any of the so called big three.

I'm in the bankruptcy camp,... (Below threshold)
Rebecca:

I'm in the bankruptcy camp, but I don't think it is happening. The Dems are too strong in Congress to break with the UAW. The Big Three need a good "enema." But the union illuminati and their political buddies will keep the auto industry constipated with old leadership and little initiative.

Let'em go belly-up.<p... (Below threshold)
marc:

Let'em go belly-up.

A GM bankruptcy brings with it assurances to future creditors another bankruptcy won't soon follow. Banks, when they have the cash, will line-up to offer loans.

If congress wants to help they should rescind all current restrictions in place that prohibit the Big Three from importing the much more fuel efficient models they all produce for outside markets such as the EU and South America.

The Big Three are all making profits outside of U.S. borders because of the cars produced there, but the nitwits in congress restrict them from being brought to the U.S.

Bankruptcy is probably not ... (Below threshold)
Larry:

Bankruptcy is probably not a good idea because of the interconnected nature of the car business. I have written on this under Jay Tea's post on the same subject.

Ideology is all fine and good, but the unintended consequences of a GM bankruptcy is simply horrific.

GM's problems are very dist... (Below threshold)

GM's problems are very disturbing to me, although they have hardly been my favorite car brand by any means. However the history of financial problems in the American automobile business is deeply disturbing as well, and I dealt with this history in great detail both on my Progressive Values as well as Wizbang Blue websites the last two days because this is such an important discussion.

The hard truth is that nothing seems to have prevented the loss of most American automobile brands since the early 1900's. And conditions are now very similar to the 1930's Great Depression, which spelled the eventual end of great American brands like Cord, Auburn and Duesenberg.

What's right here. I'm not that wise to know.

PaulIf you want yo... (Below threshold)
Larry:

Paul

If you want your word to get out, you might want to find another place to post than one run by someone who cannot handle civil dissent.

The real deal is that hundreds of brands around the world have been lost over the past hundred years, just like all sorts of oil companies, software companies, telephone companies; you get the idea. Even without a depression, brands come and go.

The issue here is the ability to manufacture automobiles in North America. By allowing GM to fail, their suppliers then fail and there is nobody to make the parts. It is that simple. My guess is that a GM bankruptcy without some sort of protection for suppliers, set up a situation where over one million worker bees have big problems. AND, how does Toyota, etc., manufacture cars with US based parts?

And excuse me, Jim Manzi got it wrong. Who the devil would have ever imagined that GM would go broke? The suppliers in question not only supply GM, they also ship to Toyota, Honda, etc. And they operate at margin because of the squeeze that has been on for years and years. There isn't much room there to absorb the loss of their accounts receivable from GM. In fact, GM probably still owes them sums from retooling costs going back many months or even years. We worked like crazy to make sure that foreign owned car companies would buy American parts instead of importing them for their plants. So they switch to foreign again. Whoopie. . .

One in nine workers in this country are associated with the auto industry in some way shape or form. Taking that ladder down is not a real good idea.

GM cars are world class for the money. The issue is legacy UAW contracts that impose costs way out of line compared to foreign owned plants here in the US and/or operated in some other country, with the exception of Germany. The higher the price, the higher the margin, so maybe that is how Germany does it.

I do wonder how many widows and orphans (irony alert) still own GM stock; how many pension firms? Imposing GM employees/retirees on the public health system such as SS Medicare, is gonna cost a serious bundle.

The first step is for GM to sit down with the UAW and negotiate. I doubt that will happen because the UAW is betting that Obama/Pelosi/Reid will pull them out, which just delays the day of the train wreck-oning.

Then there are those who are calling for the heads of companies for making too much money or not being able to forcast the future. Again, whoopie. Study history - and I am not picking at you Paul, I have shifted for addressing your points to general.

It is that in every merger where the acquiring company thought well of the management of the company they were buying, the merger went well. When they didn't, failure was 100%. Take a look at Iaccoca acquiring Jeep. Jeep's management was integrated and Jeep has gone on to become Chrysler's most valuable brand.

Take a look at Benz acquisition of Chrysler. Benz stuck their German arse up in the air, er excuse me, looked down at Chrysler management and it didn't go well. There are a dozen examples of how this works. So if in the process of helping GM or Ford or whoever, the Government decides to do away with current management, then they are likely firing the ones who can make things work.

Personally I don't want the Government running a car company. The only problem with GM's management is that Waggoner wasn't able to see the future, nor was he completely successful in getting rid of legacy labor contracts unless he had been willing to bankrupt GM before now. According to people who understand the automobile industry, Waggoner is far better than the guy from Home Depot who is running Ford right now.

It is a convoluted mess.

Larry: Toyota can manufactu... (Below threshold)
hyperbolist:

Larry: Toyota can manufacture cars in America using American parts. Why wouldn't a bunch of ruthless Japanese executives pounce on a desperate source of labor, willing to build Priuses and Camrys and Corollas for $20/hour? Wouldn't have been the case five years ago, but here we are, with the Big 3 on the verge of becoming the Big 1 (Ford)--though I bet Cadillac would be spun off to VW or possibly Renault if GM really were to file for protection.

I'm personally excited to see the new engine Ford is introducing within the next couple of years. I've heard upwards of 300hp @ 60 mpg. If that's true then it's a game changer for that company, perhaps enough on its own to salvage their non-truck business. As far as GM goes, the Chevy Volt is too little, too late. They should have left their first electric car on the market when they had the chance.

hyperFirst paragra... (Below threshold)
Larry:

hyper

First paragraph. Explain what you mean, please. I don't understand your pov or question.

Larry, My understanding (an... (Below threshold)
jmc:

Larry, My understanding (and i could be wrong) is that Gm has already done much negotiating with the UAW. the problem as I understand it is that it isn't until 2010 that the new arrangment takes effect. meaning if they cansurvue until 2010 they will start seeing significant cost savings from paying less health care etc...

jmcThat was before... (Below threshold)
Larry:

jmc

That was before the roof fell in. Now what do they do?

I would argue that thesde b... (Below threshold)
drjohn:

I would argue that thesde bailouts violate the 14th Amendment.

The Constitution is supposed to protect the individual, not groups, yet Congress does nothing to protect me.

Where's my bailout?

When do I get something from this other than a debt and higher taxes? When do I get to be free from the responsibility of continuous poor business decisions?

They should be allowed to go bankrupt. Then they have a chance to streamline, eliminate the ridiculous legacy benefits and do business properly.

I don't want to pay for their obscene promises.

Let them do Chapter 11.

What I despise is the media running scare pieces for them.

By allowing GM to fail, ... (Below threshold)
drjohn:

By allowing GM to fail, their suppliers then fail and there is nobody to make the parts.

Larry.

United went bankrupt.

Delta went bankrupt.

They still fly, and better off than they were before bankruptcy.

They're not going anywhere. It's that fear tht Democrats are wielding as s stick.

"Too big to fail" sets up a... (Below threshold)
daddyvortex:

"Too big to fail" sets up a tension between business plans that posit getting "too big to fail" as an attraction to investors. Then the gov't thinks, "Maybe we ought to break up businesses into smaller units that aren't 'too big to fail', seeing as how we have to pay the bill."

It was late and I was blear... (Below threshold)
hyperbolist:

It was late and I was bleary, Larry, but I think what I meant is that unemployed UAW workers would be a ready source of labour for any Japanese/German manufacturer looking to take advantage of the already-built infrastructure (especially rail--the most essential component of large-scale automotive manufacturing). GM is poised for bankruptcy, Chrysler is already finished, but Ford appears to be pulling itself back from the brink (esp. with the high-output, high gas mileage engine they are going to be producing shortly). Going to be a lot of skilled/unskilled laborers looking for work, and $20/hour will be better than welfare.

While certainly not a good thing for manufacturing in the short term, the demise of GM and Chrysler (and who knows, maybe Ford too, I could be wrong) will leave a void that Toyota/Nissan/Honda/Hyundai could step into and take advantage of. People will still be driving cars, and someone's going to have to make them. If the UAW collapses--how amazing would that be?--it's not unreasonable to imagine foreign automakers stepping up their manufacturing operations in America.

Or do you think that's completely delusional?

William Ayres emerged from ... (Below threshold)

William Ayres emerged from his pre-election seclusion to appear on Good Morning in America today. Strangely enough the producers of the show felt that all of the controversy surrounding the relationship between Obama and Ayres didn't warrant any investigation or interview, but the release of a new collection of lies and anti-American propaganda penned by Ayres did. Is there any thinking American left who cannot see the insidious nature of the press and their sycophantic coverage of their chosen candidate? Make no mistake; the media hoisted this character on the nation through their lies, omissions, and distortions and they should be held responsible for the disaster that is unquestionably headed our way. Never did we see a serious examination of Obama, his policies, past relations, or a questioning of his paper thin resume....

More at:
http://www.hostileopposition.blogspot.com

drjohn and anyone else who ... (Below threshold)
Larry:

drjohn and anyone else who needs to take a remedial reading course:

AGAIN, the problem with GM going broke is that they will not then pay owed money to parts and sub assembly suppliers, many, if not most, of whom are working at margin right now, do not have the capital to survive without payment and are likely working on 90 - 120 days of receivables.

This means, again, that if GM defaults on that debt, the suppliers fail. Those same suppliers ship to Ford, Chrysler, Toyota, Honda and every other assembly line operator in the US and elsewhere.

If the parts suppliers fail, and not just here in the US, automobile manufacturing will cease in various places in various ways until the system gets restored. Where is the money to fix things?

Read this again please. If there are no parts, there is no assembly by ANYONE. Foreign operators will ship parts made overseas. Our own domestic parts suppliers will be belly up. Reduced competition will mean higher prices, duh. We don't know if foreign capital will buy up the US parts plants or not. They may choose to invest in their own home country.

This would not have happened two years ago because there was money to borrow. There were those who bought up parts suppliers out of bankruptcy such as Wilbur Ross. The same conditions do not apply today.

The bottom line is that with over a million laid off, health care costs and unemployment and reduced taxes means that it probably a good deal cheaper to save GM than pay for the cost of the failure.

Now for those folks who have never run an assembly business, take a look at logistics. There is NO excess parts supply ships floating around, so to speak. Railroads are running at optimum between parts mfg and assembly, and cannot easily switch to between ports and assembly. It will take TIME and money to arrange a different flow of just in time parts and sub assemblies.

Line up the dominos and think "unintended consequences." Again, this is a convoluted mess with no easy idiological solutions or magic wand.

hyperNo, you are n... (Below threshold)
Larry:

hyper

No, you are not delusional. Eventually it would sort itself out. But the final demise of US owned and based manufacturing would then cut our credit rating and hamper loans to continue to support our deficit financing.

The dominos have many, many unintended consequences associated.

For example, our own standard of living is associated with cheap energy and automobiles.

Guess what will happen if the price of automobiles go through the roof followed by oil at $200 a barrel?

Guess what will happen i... (Below threshold)
_Mike_:

Guess what will happen if the price of automobiles go through the roof followed by oil at $200 a barrel?

An increase in cost of oil means an increase in the cost of fuel means an increase in the cost shipping means it's cheaper to produce 'it' closer to the end consumer... means that a disincentive exist for shipping in the foreign made parts you previously mentioned. But I'm guessing that wasn't your point ?

Slightly tangential...
This morning on my way to work, I was thinking how the failure of Freddie and Fannie were being pushed as a failure of the free market. That is, the failure of two Government Sponsored Entities was a result of the failing of a free market ? If the government is participating in the market, then by definition it's not a free market. Viva la guvamint edgikashon!

MikeThe US has lon... (Below threshold)
Larry:

Mike

The US has long been the "Consumer" for developing countries who are well on the road to producing product. Many years ago, the US itself played the China of today. You can read all about it in "The backside of American History" by Ed Wallace.

Japan, China, Europe, and other places are more than willing to absorb the cost of shipping if it means payroll in their own country. The problem will be the ability of the US to absorb the product on the back of increased costs and higher gas prices.

Higher energy costs have been the precursor for just about every recession/depression the world has seen. Look it up. This time is no different. Lower energy costs will help us to recover, but that is only temporary. We still have the problem of importing our energy instead of producing it here.

America was at its peak when it produced its own energy at levels to satisfy domestic demand and export some.

I keep adding to unintended consequences of a GM failure. One addon is cash turnover multiplier equalling Gross National Product. Shipping parts in to be assembled reduces our own multiplier. Tax revenues will go way down and costs will go way up.

We are in a squeeze.




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