Tuesday, March 17, 2009

GM and Chapter 11

I want to get back to my "building a law practice" stuff, but this GM and Chapter 11 thing is really bugging me. I read today that the GM chairman strongly believes the company cannot go into a Chapter 11 because the public will not buy cars from a company in reorganization, and they will end up in liquidation.

Pardon my ignorance, but wtf is this guy talking about?

I don't need graphs and charts to see where GM is going as we speak.....on a straight line to liquidation. No bailout, no loan, no stimulus, no miracle is going to stop that. It's a competitive world, they are not competitive, they will go out of business. I've heard it said "they are too big to be allowed to fail". Isn't it obvious that they are "too big to succeed"? Being too big to succeed is the hallmark of un-competitiveness. They are weighted down with bad contracts, a bad dealer system, and product lines that have been behind the times and probably can't catch up. Certainly they can't catch up with all the excess baggage.

The brass at GM can keep referring to Chapter 11 as "bankruptcy", as if saying that will scare the country into endlessly bailing them out. Chapter 11 is NOT bankruptcy per-se, it is re-organization. If the reorganization does not work, THEN you go into liquidation (bankruptcy).

A Chapter 11 filing is a very powerful thing. It immediately stops the bleeding by putting a stay on your creditors. It compels the filing of a re-organization plan. It enables a company to renegotiate almost any problem on their agenda. Oh, and it enables the filing company to obtain fresh financing, as CHAPTER 11 FINANCING IS PREFERRED OVER ALL OTHER CREDITORS!!!! That's right, while a company is re-organizing, lenders who assist jump ahead of all other creditors, even secured creditors. The way the government should "bail out" GM is to either provide the Chapter 11 financing, or guarantee the financial institutions who will give the financing. Personally, I think this is what President Obama has had in mind all along.

I am struggling to understand why the GM leadership is so opposed to a Chapter 11 filing. I can understand why the unions are against it, the best parts of their contracts will be history, unprofitable plants will be closed (as they should be), and the company will be made leaner and more competitive. You would almost think that if it's so bad for the unions, management would embrace it. So why don't they?

Well, another party who takes a beating in a Chapter 11 is the stockholders. Hey, aren't most of the executives also big stockholders? How about executive jobs, and executive pay? Guess those would come under fire in a re-organization too. GM had some cash reserves that would have been nice to use as a cushion in a reorganization. But I guess it seemed better to deplete that, bleed the taxpayers of some useless bailout money, and then face the inevitable. Resisting the filing, and waiting until the company really should be in liquidation, may just doom the Chapter 11 to exactly what the executives claim they want to avoid.

Bankruptcy (reorganization or liquidation) are fascinating tactical cards, played in various ways at all levels of business. I've been involved in cases where the mere realistic brandishing of the bankruptcy sword totally changed a negotiation and settled an unresolvable situation.

The problem with GM is the brandishing and talk about a Chapter 11 hasn't convinced them to DO it. As is often true in bankruptcy cases, there has to be a catalyst, something that forces a companies hand. I can understand why President Obama did not force the filing in his first week in office. Had it been any other time, forcing a "pre-packaged" Chapter 11 was clearly the right way to go.

Watch for this......when they get to the brink, and it won't be long, President Obama will orchestrate GM into Chapter 11. It's the only way. Hopefully it's not too late for a reorganization to actually work.

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