Would a G.M. Bankruptcy Save Taxpayer Money?
By DEALBOOKArticle Tools
As General Motors and Chrysler race to pull together their restructuring plans ahead of a government-mandated deadline on Tuesday, one of the top academic experts on distressed debt and bankruptcy is calling for the Obama administration to dispense with niceties and push the carmakers into bankruptcy.
If done right, the move could help ensure that taxpayers remain first in line for repayment, according to Edward I. Altman, the Max L. Heine professor of finance at New York University’s Stern School of Business.
“The question is, does the Obama administration have the courage to take that next step?” Mr. Altman told DealBook on Sunday.
It is a stance that Mr. Altman, who is the director of N.Y.U.’s credit and debt markets research program, has publicly espoused for some time. Chief among his concerns now, however, is not only reaching a way to restructure G.M. and Chrysler in the least painful way for the companies, but also to protect the billions of dollars in government money lent to the companies.
The Treasury Department — which The New York Times reported Sunday is now taking the lead in negotiating with the carmakers — already has hired an investment bank, Rothschild, and two law firms, Cadwalader, Wickersham & Taft and Sonnenchein, Nath & Rosenthal, as advisers.
One of the goals of these advisers is to ensure that taxpayers fall in the top layer of G.M.’s capital structure, a person close to the Treasury department told DealBook. The $13.4 billion that G.M. received in December was made in a way that ensures that the government is what is known as a senior secured lender, with assets backing up the loan. But in another, smaller batch of multibillion-dollar loans, the government falls behind several banks in terms of being repaid, this person said.
To remedy that, Mr. Altman proposes this: the government force G.M. into bankruptcy, then provide what is known as debtor-in-possession financing for the carmaker, probably through a bank or finance firm like General Electric’s GE Capital. Mr. Altman pegs the necessary amount at about $50 billion, given G.M.’s cash burn rate of about $2 billion a month.
The money would ideally be doled out in increments, with G.M. needing to hit certain milestones to receive the next infusion of cash.
“Basically, the idea is that we’re going to stop throwing good money after bad,” he said. “I think it’s very important that the government take a stand on this somewhere. Otherwise, it’s going to continue.”
There’s a specific reason the government should provide the DIP financing, according to Mr. Altman. In bankruptcy, such a loan is given priority status over all other claims, and only rarely has a company defaulted on a DIP loan. (One banker specializing in DIPs describes them as “belt-and-suspenders financing.”) Yet the market for DIP loans has only recently started to crack open, with much of the money coming from companies’ existing lenders instead of new capital.
Moreover, Mr. Altman points out, the largest DIP loan on record is the $8 billion lent last month to Lyondell Chemicals. Cobbling together a bank consortium to provide $50 billion would prove unwieldy, given the troubles in the banking industry, making the government the ideal source of the financing. However, it should still try to twist the arms of banks that have received federal bailout money to stump up some of the needed money.
Much of the opposition against pushing the likes of G.M. into bankruptcy is the disruption that such a huge event would cause. But Mr. Altman discounted those worries, saying that if the process was done right, the markets would recover. Important steps are actions that have already been discussed, including some sort of guarantee for auto warranties, even in the worst-case event of a G.M. liquidation.
More importantly, bankruptcy will finally allow G.M. to save costs and more effectively bargain with its various counterparties, including suppliers, auto unions and bondholders.
“The markets might be a little freaked out, but things have softened up a bit,” he said. “There will probably be some reaction on the part of the markets, but look at what the bonds are selling for. They’re already at below-average bankruptcy levels.”
–Michael J. de la Merced
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One major sticking point has been and continues to be that of predictability. Neither GM nor anyone else are in a position to predict that they will be viable given a particular union wage. The wage appears to represent a good talking point but one that in time will be immaterial.
Perhaps it would be helpful if both parties (manufacturers and unions) viewed each other as parts of a whole system; neither can exist or prosper without the other. Each represents a part, but only a part, of what will eventually be the value added product. Better yet, if both were involved at the input end, both have a claim as to their vested interests in the outcomes.
But, as we’ve been seeing, if the purpose of meetings between GM and the Union representatives is merely to hammer the Union into submission under threat of dissolution, all parties will lose. If both lose, the country loses.
The Union is necessary because GM management on its own apparently feels vehicles are dropped from the sky, without involvement by others. Does anyone need to point out that it serves no one to maintain this position?
GM will not survive without the US Treasury. That is predictable. But the question still lingers – should it?
— ConstantineOf course it would! One of GM’s primary problems is that retiree burden. It’s the same mess that state and local governments find themselves in… but GM doesn’t have taxpayers to pass the bill onto. Lifetime healthcare benefits, COL adjustments, guaranteed investment returns on retirement savings (the 43% decrease in state retirement investments are passed onto taxpayers to the current tune of more than $100 billion dollars), none of these schemes makes any economic sense at all. Under current contract law the only way out is bankruptcy. So, force GM into bankruptcy, force government oversight and shed that retirement debt. Then, continue the process and do this to state and local employees, too.
— Mike BrooksSo we’re going to take it out on the unions, like we’ve been doing the past 30 years? We’re going to make the companies fire a huge part of their workforce? We’re going to deny workers and retirees healthcare? Where’s the stimulus in that? How does that help the economy?
Why don’t we provide a direct incentive to buy American cars – by instituting a program of direct car-buying grants? These grants could only be applied to used or new American cars. By using grants instead of tax cuts, we would help enable even the unemployed (by some estimates, currently more than 10% of our total workforce) to stimulate the economy and save the auto companies.
— A StrategistAgree with a previous poster. Provide a grant or some sort of nation-wide incentive to buy cars made by the Big 3. I’ll make a difference, even in this economy.
— Al$50 billion at $2 billion per month means GM gets a lifeline of two years. Out of that it is going to have to refinance its debt, pay its workers, convince the consumer the company will be around for a long time, and develop new product. In effect GM becomes Government Motors. What strings are attached to this money? Will part of it be used towards the funding of the Health Trust that was established in 2007 for the benefit of the company’s retirees? By the time all of these and other details are ironed out more money will be required and how does GM pay the interest on the loan? How much is parcelled out to GM’s suppliers? Will it be used to compensate the dealers of products that are discontinued. The devil is in the details.
— Stephen KurtzToo many questions and not enough answers
I agree with Mr. Brooks and do not agree with A. Strategist.
Why should the Govt. provide grants to people who buy American cars? That is the Govt. subsidizing a losing manufacurer who is building a product that the consumer does not want to purchase. Should we also give grants to people to buy freezers and riding lawn mowers?
G.M. makes to many cars in to many models. The management of G.M. want to continue doing business in the same old way, just using taxpayer money to finance it.
They made unwise decisions in their negotiations and contracts with the unions. They can’t fund their contracts with the unions without taxpayer money.
Let them go into Bankrupcy. The Debtor in Possesion would then be able to replace the incompent CEO, invalidate the union contracts, sell manufaturinag assets, and yes, somebody will buy those assets, probable at a reduced price.
But to throw money at a sinking ship makes no sense.
— Tom JacobsWhat ever happened to the ideal of failure and success? Failure equals nothing, success equals reward.
Simple logic, but somehow the “smart people” in government and in the corupt corporate world feel they should be rewarded for failure, and really lather themselves up during times of success. OH They also lather themselves up during failure as well.
Here are things that I have observed pertaining to the economic mess that the America is in:
1. Most if not all of the major banks involved in robbing America are run by greedy white men.
2. These greedy white men have been called “the smart people”
3. Government does not have a clue because the rules are grey and change on a daily bases.
4. Watching the news is frustraiting We are going to give these clowns the money after all.
5. Failure equals hand outs in money, thanks government!
6. I am inspired to start a really large company and fail and expect my hand out…I would get the money because I failed…sounds dumb doesn’t it, because it is dumb.
If I had the answers I would do something, but I do not. In the end I will continue to read about the quandry that the culture of greed has produced and remain frustrated everytime I hear “smart people” with regards to bankers, CEO’s and government officials, in media sentences and brain storm Ideas for the future.
Upset Village Idiot
— StephenWhat the unions and the execs have in common is that they don’t care what happens to any other stakeholders in the company, as long as they get theirs.
They both feel they are “entitled” to whatever they’ve been able to wring out of their companies. And it’s that arrogance that has caused such hostility towards unions as well as the execs.
What a moment it was when the clueless Captains of Industry alighted from company jets only to get smacked in the face by reality as the “little people” experience it. Now it’s time for the unions, equal partners in raping every large industry in the U.S., to get a whiff of the air I breathe.
Other than the union worker (and the execs,) no-one else has endless job security, high pay that keeps getting higher, and lifetime health care forever and ever, amen. Any wonder why non-union people, often scrounging for a $10/hr job with little or no benefits are not real pleased with execs OR unions?
I don’t care what you were promised, Mr & Ms Union person, stuff happens, life changes and it’s adapt or die. Your choice. Your greed is now your own worst enemy.
— ScrivenerThere has been a lot of speculation that the only way for GM to survive is for them to do a Chapt.11 bankruptcy. This may well be the necessary so that GM can renegotiate its debt loads. I’m sure the union feels that its totally unfair to expect them to have to give back negotiated benefits. In the end both groups would most likely be significant stake holders in the regrouped company. The real injustice here is to GM’s suppliers.
For GM to do the bankruptcy and then to leave the suppliers as unsecured creditors is tantamount to legalized theft. A GM bankruptcy would be devastating to the automotive suppliers. Good luck with GM being able to build any cars when there are no parts to be found after the suppliers have to file Chapter 7
— Perry ThomasI disagree with the previous post about a tax incentive for American cars. What about all the Americans who work at foreign car companies with factories in the U.S.? What about all the Americans who work at foreign car dealerships in the U.S.? What about all the mechanics and service personnel who work on foreign cars? Your strategy would distort the market for cars and hurt Americans employed by foreign car companies.
If certain American car companies can’t compete in the global car market maybe we should deploy our resources elsewhere and let more efficient companies build cars. Or maybe we should have subsidized the Pony Express to deliver our packages for the sake of all the riders and horses it employed.
— MackLets just change GM to General Retiree Management Co., throw some bucks at Ford for being very brave and leave Chrysler to FIAT to figure out. Then allocate a big chunk to the “car industry of the future”.
Seriously, this claim that Chapter 11 is not a viable solution for the auto business is completely out of synch with the reality of the situation. Gas is going up again, the economy has yet to hit bottom and this Detroit morons (unions, management and suppliers) are all protecting their turf.
Meanwhile, you can be sure that Toyota is going to retool itself as one lean mean fighting machine….
— williambanzai7I do not think that forcing GM into bankruptcy can do any one any good.
— suyeshIt will lessen the confidence of the buyer of the cars in a company which might fail. Because you need parts and accesories even after many years of buying the cars. If GM is put in a situation where it has to file for bankruptcy it will just drive the customers away.
Cutting more jobs would not help either for the tax payers money will be spend anyways on the health care and other benefits of the unemployed.
I would bet on it. I think FORD like Toyota, stands to gain a lot if GM shrank or went to zero.
The market for vehicles is the market for vehicles – no matter which brand; it is a finite argument at any given moment. So, with one less player, the demand accrues to the remaining players. In the end, you only build as much as meets demand or you fail. Ok, with some hiccups, I’ll give you that.
When it comes to jobs, their number will be right-size to demand whether GM stays in the game or not. With one less player, demand would adjust to brand, and jobs would follow demand and capacity adaption.
Too bad the CAW is not as flexible as the market. They would better serve their constituents to be creative and encourage hope, job sharing, and relocation possibilities.
In manufacturing, demand, capacity, and supply all eventually end up in the same places. Smart people get it and always fall back on their feet.
SD
— Stephen DukeHey “A Strategist”,
When you buy your American car you might be saving a Canadian job. Or, better yet, you might be denying another Texas-built Toyota pickup plant worker the right to a day’s work.
Earth to Strategist: The world economy is Globalizing. Economic Patriotism is a fool’s game.
American’s own shares in VW too you know! Besides, their new TDI’s keep the American air cleaner too – keep it to yourself. You wouldn’t want the Mexican’s to get any of that. Oh yeah, you built a wall for that….but that is a whole other kettle of fish…
SD
— Stephen Duke@ A Strategist
Maybe because foreign automobiles are the superior product? I’m not saying that that is the case, but it isn’t to logical to force consumers, especially on the government tab, to purchase something they don’t want.
— M. MilkenDoesn’t “A Strategist” understand that the UAW is not just part of the problem, it is the MAIN problem. Too many work rules, too little output, way too many benefits, and too much money. This is proven by Toyota, Honda, etc who use non-UAW American labor to make a BETTER product for less money. And, workers at the “transplants” are happier! Labor needs to stop thinking that they are guaranteed income with silly “jobs banks” and unrealistic unemployment income. Why work? There are millions of out-of-work people who would gladly take an “entry level” job at GM or Chrysler–there is no shortage of labor. There IS a shortage of capital, which is why GM & Chrysler are begging for money, not more under-performing workers!!
— reality in hawaii“reality–what a concept!”
Yes, “the market may get a little freaked out” but there is no risk in this….we allready tried it with Lehman and look how well that turned out for the economy.
— reality checkLet me preface my comment with a little personal history: 52 years old, male, born and raised in Detroit and my father worked in the auto factories for 40 years. I have 5 brothers and sisters, countless nieces, nephews and grandnieces and grandnephews. I went to a college started by Henry Ford and then on to graduate school. My daily drive is a 2002 Jeep Grand Cherokee (115,000 miles) and my wife drives a 2004 Ford F-150 crew cab. Detroit’s automakers made all of the above possible.
Comment: We have an $11.6 trillion economy; it will survive a GM chapter 7 or 11 bankruptcy and Chrysler drying up and blowing away. While the debate about about creationism or evolution is applicable (though moot) in science, in business Darwin rules.
— carlMr Altman’s thories are based on ideal times, these are unpressidented times, the whole globe is in recession. There has never been a restructing like GM, and probably the whole nation’s auto industry, with the shareing of suppliers, could conceiveably need government loans and assistance. I think Mr Altman should punch in some more numbers.
— AmericonioAnd as far as the retirees insurance, why not go after the AMA, and pharmaceuitical curtails, these are the real firms who we should be focusing on. When are we going to wake up America? Every industrailizied nation in the world has realized this, except the USA. These Doctor, Hosipitals. and Medications prices are unreal. Wake Up America!!!!
Gm needs to stop paying 28 dollars an hour. 15 dollars with health benefits and a 401k(not a pension) is what the union workers need. Only after it solves the wage problem can GM start to become a solvent company.
— happyzorif we provide incentives to buy american cars from the big three how do we know where they are made? maybe all autos should come with a window sticker that states place of production,what percent u.s .parts. problem is its getting easier to find a forigen car built at home than one from the big three. this problem for the big three has been going on for thirty years. unions blame management.management blames unions, and unfair forigen imports. when in reality they are all to blame. proof is in the pudding ,if you build a better product people will buy it
— robWhy not issue checks for the public to buy cars??? Because after they have bought their cars, there will still be an auto industry bleeding dollars and the same mess you had before.
The problem has many layers. The auto makers have been acting like fat unimaginative, unimaginative lazy cats for decades, relying on their brand names and sales networks to bring home the bacon. Unions have asked for more and more of the bottom line, raising fixed costs to point of no return; and government has been raising the bar through taxes and regulations.
It looks like an industry in need of a giant haircut. If Obama wishes to see a future for the auto industry, he should get out of the way, and let the financiers and entrepreneurs figure out where the value is and how to turn a profit.
But he won’t do that because he is a socialist and a professional politician who has never had to rely on making a profit to provide for his family’s welfare.
Taxpayers are going to lose big on this deal. And the government is going to keep pumping gas into a car that gets five miles to the gallon with a leaking gas tank….
— MikeA Strategist: Applying your logic, I propose we institute a program of hole-digging and hole-filling grants. Offer grants to one set of American workers to dig holes. Then offer grants to another set of American workers to fill them. Then start the whole process all over again. That will provide an endless stimulus. :) Capital is not meant to be wasted on unsound companies, inferior products or grossly overpaid blue collar workers who expect to sustain middle class lifestyles with high school diplomas. It is meant to be channelled to the places where it can be employed most productively and efficiently, and for the highest returns. Right now those places are in Shenzhen and Taipei, not Detroit. When American workers are willing to work longer hours for lower wages, the capital will come back. :) If a highly educated corporate lawyer or doctor can work 120+ hours a week without so-called “overtime,” why not a grease monkey who is frankly lucky to be holding down a job over a billion other people could do with minimal training for a fraction of the cost?
— Finally, Global Wage EquilibriumAre GM and Chrysler (and Ford?) zombies yet?
Since we cannot fund the car companies enough to cover their current obligations, survive a three year downcycle in auto purchases, and retool to compete effectively with new technology, all we can do is dribble out taxpayer money.
Aren’t we kidding ourselves by trying to avoid bankruptcy?
— Ron RandallDidn’t Henry For start off by making fairly simple machines that could be afforded (no pun intended) by his workers? Can’t Detroit now turn to making simple cars that people can afford? Do we need computers in cars, or cupholders, or simulated leather, or al the other pseudo-coices people seem to need in order to be differentiated from their neighbors? And get rid of the management that couldn’t figure out 20 years ago that their foreign competitors made a better product!
— BE