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Will GM file for Chapter 7 or Chapter 11?

Posted Nov 12th 2008 9:00AM by Peter CohanPeter Cohan RSS Feed
Filed under: General Motors (GM)

On Monday I told a TV interviewer that General Motors (NYSE: GM) would probably not last the week. It is looking more like that prediction will come true. With $16.2 billion in cash, GM needs $10 billion to pay its bills. But it will go through that by the end of 2008 since it is probably in default on $6 billion worth of credit agreements which would require GM to pay back those loans immediately. And GM has already been bankrupt in an accounting sense for years -- its liabilities exceed its assets by $58 billion ($12 billion more than in 2007). This raises many questions: Why is GM in this condition? What are its options? Should the U.S. government step in? Does it matter? Where do the bailouts end?

GM's basic problem is that it spent decades making excuses for why it could not give customers superior value rather than building better vehicles. With 2.5 million jobs on the line, Chapter 7 -- a complete liquidation of its assets -- could throw all these people out of work. Who are these people? Auto companies are big buyers of manufactured steel, aluminum, iron, copper, plastics, rubber and electronics -- and their dealers are people too. One study estimates that the workers in these companies could lose $125 billion in income.

So the U.S. government could provide a financial guarantee and some money to encourage financial institutions to give debtor-in-possession (DIP) financing which would allow GM to operate in Chapter 11. As a condition of the deal, its top executives ranks should be replaced with strategists who can decide which parts of GM to close or sell, and which can operate profitably. A better solution would be a pre-packaged bankruptcy where new contracts with creditors would be negotiated before the filling -- but GM is probably too complex to accomplish this ahead of time.

We will stop bailing out people when we run out of bailout money and lobbyists to fight for it. Starting with the bailout of Bear Stearns, the U.S. lost any logical basis for turning down anyone seeking taxpayer money. For example, why did the U.S. think it was OK to give $29 billion to keep Bear Stearns from going under but was quite comfortable letting Lehman Brothers file its $639 billion bankruptcy? Cat got your tongue Hank?

The simple fact is that GM is big enough to hire the lobbyists it needs to make the case that what's bad for GM is bad for America. (And the average taxpayer is not.) The big economic crime is that GM's board kept supporting the CEO who presided over a 96% loss in shareholder value since he took over in June 2000. If GM had invested the profits from SUVs and vehicle financing that it made during the boom years into cars that customers were eager to buy, it would not be on the brink of bankruptcy.

If President Bush resigns this week, President-Elect Obama could take over and make a terrible choice (GM in Chapter 11) to avoid a catastrophic one (GM in Chapter 7). Since that won't happen, it looks to me like GM could be in Chapter 7 very soon -- adding another remarkable "accomplishment" to a historic legacy.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in GM securities.

Tags: auto sales, automakers, AutoSales, bailout, barack obama, BarackObama, featured, financial crisis, FinancialCrisis, GM

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