The automobile industry thought it could follow the successful sales pitch that George W. Bush used to sell the Iraq War and Hank Paulson used to sell the $892 billion Troubled Assets Relief Program (TARP) who kept repeating that the alternative to not giving them what they want would be catastrophe. But America may finally be wising up to the hollowness of that ploy. And the great news is that the auto industry is finally starting to adapt to this reality.
Rather than claiming that there is no Plan B and that a bankruptcy would lead to a depression, it is now considering a pre-packaged bankruptcy. As I posted last month, the options for the industry are Chapter 11 (wiping out common shareholders while restructuring and continuing to operate) or Chapter 7 (liquidation of the assets).
There is no reason that U.S. taxpayers owe the auto industry their money -- and in a free market economy the bankruptcy process is designed to help industries fix their problems. If the auto industry is now willing to consider using this process to spur a restructuring that will lead to a smaller, but viable industry, I believe this is how our economy should work.
That's why I think it's good news that General Motors (NYSE: GM) is considering Chapter 11 -- in prepackaged form. Contrary to the dire predictions, 77% of bankruptcy filings of companies over $1 billion in assets do not lead to liquidation. A prepackaged bankruptcy for GM would involve working out concessions with stakeholders, including workers, dealers, suppliers, and bondholders. Once those concessions are finalized -- over six to 12 months -- GM could then take the agreement to a bankruptcy court.
What would be the government's role in this? It would probably need to step in to provide money for operations during the time that GM was working out the details of the prepackaged bankruptcy. And government would provide guarantees on auto warranties and pay parts suppliers. After a prepackaged bankruptcy is approved, it generally takes two months for the company to emerge from bankruptcy -- far less than the average two years for a regular bankruptcy.
What would a prepackaged bankruptcy look like? Here's a six step proposal that would save $16 billion. But it leaves out details such as how much of a haircut workers, dealers, and bondholders would take.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
12-04-2008 @ 11:31AM
Stock Lurker said...
That's nice, but we haven't been in a free market society since the 1930s. It would be nice to start, but I'd don't think it really anything more than idealism at this point to say otherwise.
One could just include the government is also the market when they talk about free market policies and rationalize it that way.
Makes sense to me.
12-04-2008 @ 11:42AM
JT said...
ARE YOU FREAKIN KIDDING? IF THE DOMESTIC AUTO COMPANIES FILE.....IT IS THE END FOR ALL OF US! HOW DO YOU NOT SEE THIS! GM/FORD/CHRYSLER GO UNDER.....FOLLOWED BY FIRESTONE/GOODYEAR/GLASS MAKERS/RUBBER/TIRE/COMPUTER COMPANIES/ADVERTISING COMPANIES/LOCAL TOWNS WILL LOOSE MILLIONS IN TAX REV. NOW WHO PAYS FOR THE POLICE/FIREMAN/ ROAD REPAIRS/SCHOOLS!!!!!!!!!!!!!! IT IS INSANE THAT IF YOU THINK YOU ARE NOT INCLUDED YOU ARE SO WRONG! TOYOTA/HONDA/NISSAN ALL WILL BE HURT ALSO....SUPPLLIERS ARE CONNECTED..NOW THEY CANNOT GET THERE PRODUCTS....WHICH MEANS THEY RAISE THE PRICE OF THERE CARS.....YET NO ONE HAS A JOB TO BUY THEM? SORRY FOLKS........A BAILOUT IS THE ONLY THING WE CAN DO. WE NEED TO DO IT FOR ALL OF US!!!!! AND NOW!!!!!!!!
12-04-2008 @ 12:04PM
Bob Navarre said...
Since when did anybody at the top start worrying about taxpayer money,I think our goverment should make what other foreign goverment make. Level the playing field for the automakers you can't compete with countrys paying poverty wages.Remember Pearl Harbor they could not beat us so now they are buying us and are American people are helping them.I might forgive them because God says we should but I don't forget.The japs flood are markets with there products until are AMERICAN jobs are gone .In the 1950's we made everything here toys,bikes,TV's etc.Won't be long the UNITED STATES will be owned by the japanese. Wake up AMERICA before its to late
Thanks and may GOD BLESS AMERICA
100% AMERICAN
12-04-2008 @ 6:03PM
david said...
Once again we see a lack of transparency from the media and out poiticians.We talk of bailing out Dertoit's Big 3. Is it not true that the foreign transplants received massive financial incentives from the states in which they located. including grants of land and multi year tax concessions. And all this so they can assemble their products with most components manufactured in their home countries. Autos are the last big industry still here in America. When the truth is told, they deserve our full support. They made mistakes but that is not a sin. Now they are making an honest effort to get back into the market which was battered not by industry but by unscrupulous fiancial institutions.
12-04-2008 @ 6:11PM
Pat said...
Mr. Cohan,
If you are correct about a bK being planned by GM, I will be anle to start a class action on them as consisitently they have dinied any consideration of BK !
So do keep and document your sources.....
I think you are wearing blinders and therefore come across as one with an axe to grind? Or are you looking for some consulting work?
Knowing these guys in Detroit, you should kiss any job prospects in auto related field.
Also IF they go BK, I will organize a demonstration at GM HQ that makes sure th etop 10 % mangers go home tarred and feather, not in their free cars but on a donkey !
12-06-2008 @ 11:36AM
Dan said...
We should let them file bankruptcy. The big 3 need to get rid of their union totally and start over with no union involved. They are one of the biggest drains on them. They are all over paid and they're fringe benefits they want and get are way to high. They need to come down to earth
12-08-2008 @ 12:25AM
jody said...
WHY DO YOU ALL HATE THE UNIONS, GEE COPS, PROBATION AND PAROLE, TEACHERS HAVE UNIONS BUT FOR SOME REASON THE UAW NEEDS TO GO? HOW ABOUT THE IRS I THINK THEY NEED TO GO. TAKE MONEY FROM US ALL FOR US TO WORK HOW NICE OF OUR FREE COUNTRY. THINK ABOUT THAT.