First Take on GM: Packaged Bankruptcy Inevitable

by: Michael Steinberg December 03, 2008 | about stocks: GM    

Michael Steinberg

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Listening to the General Motors (GM) press conference Tuesday evening, I could see no clear way for GM to avoid a structured bankruptcy. A press member stated that the elimination of the Oldsmobile brand and their dealerships cost GM at least $1B, which GM did not deny. Union worker buyouts over the last few years drained a significant amount of cash. GM spoke about further dramatic structural downsizing and dealer consolidations and eliminations. Selling Hummer, Saab and Saturn seems to me impossible, and these brands cannot be eliminated for free. The new Pontiac-Buick-GMC scheme is no improvement from the current scheme, and certainly not differentiated from Chevrolet offerings.

Real change would be eliminating Pontiac, Buick and GMC entirely. Given that this would be too costly to do outside of bankruptcy, a prepackaged bankruptcy is the only long term solution. GM is negligent for not having this ready. A streamlined bankruptcy with the government providing debtor in possession financing would actually improve customers’ confidence. Uncertainty is GM’s worst enemy.

GM alluded to other fantasies like bond holders accepting principal write-downs and possible equity exchanges. With the government’s track record of improving shareholder value, bond holders are likely to stay put. And would the unions accept a reduction in jobs, healthcare and other retiree benefits without bankruptcy?

All of the changes GM is either professing to make or needs to make will be too time consuming and expensive, if not impossible, outside of bankruptcy. Think about lethargic progress in mortgage modifications and you’ll get my point.

Congress needs to question the speed of change and all the impediments before approving any support for GM. Just like Treasury Secretary Paulson sent Morgan Stanley (MS) into the GSEs, Congress needs an independent evaluation of GM as quickly as possible. The government could nurse GM long enough for outside experts to package the bankruptcy.

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This article has 7 comments:

  •  
    Dec 03 05:18 AM
    A bankruptcy for GM would mean the destruction of an already fragile economy. Too many jobs and retirees are connected directly to GM and many more indirectly.
    Reply | Link to Comment
  •  
    Dec 03 06:29 AM
    I agree and have been advocated DIP process for GM for a long time. The government could provide the financing mechanism. They need serious restructuring. Wagoner and the board are delusionary and should be removed immediately.
    Reply | Link to Comment
  •  
    Dec 03 08:22 AM
    I agree with this 100%. Some sort of government assistance is inevitable. The automakers can enter bankruptcy now, or later (after burning through a round or two of government cash).

    Take the tough medicine now. A healthy auto industry means shedding capacity in manufacturing and in dealerships. That will be painful, but that is the sad reality.
    Reply | Link to Comment
  •  
    Dec 03 08:30 AM

    How does a GM bankrupcy lead to destruction of our economy? GM would not be liquidated but, rather, restructured so it can thrive in the current envionment. If GM's employees want the best opportunity to keep their jobs, they'd enthusiastically support restructuring through chapter 11 bankrupcy.

    On Dec 03 05:18 AM User 263844 wrote:

    > A bankruptcy for GM would mean the destruction of an already fragile
    > economy. Too many jobs and retirees are connected directly to GM
    > and many more indirectly.
    Reply | Link to Comment
  •  
    Dec 03 09:17 AM
    Like a delicate glass with cracks; the slightest movement can break the glass into pieces.

    Re-structure GM once the global economy becomes less fragile or at least already on the way to recovery.

    G7 and G20 know how fragile the global economy is. Add the most recent terrost attack in India and the resulting escalation of tensions between India and Thailand - we have a very uncertain future ahead of us in both economic and political fronts.

    This can easily lead to global political instability much like what happened after the Great Depression that resulted in the rise of Hitler and World War 2.

    This is not lost with the US administration.

    A few hundred billions of dollars of bailout or even outright subsidy to the automakers for the next few years can be considered "cheap" if the current financial crises morphed into global political crises the likes of which has never happened in a century.
    Reply | Link to Comment
  •  
    Dec 03 10:10 AM
    This is simply not an option. These are real companies with payrolls and interest payments to make out of cash, which is evaporating rapidly. You cannot expect the taxpayer to just take over the liabilities of an ostensibly private company for a while without some stake of ownership. Much has been said about the "unfairness" of the auto situation relative to banking. Those people should go look at the specific terms under which that assistance is being rendered to banks. The government basically owns those banks at a date in the not too distant future. If you are proposing that we nationalize the automakers and run them for a loss at over capacity, then we would be no better/different than the infamous Soviet tractor farms turning out product that nobody wanted to rust in a yard somewhere.

    This is a bit like the "third rail" issue of Social Security reform. Any politician who proposes a painful reform is taken out and shot because there are always stupid or unscrupulous opponents willing to say that maintaining the status quo benefitis is an option and ignorant voters willing to elect them on a promise they cannot keep.


    On Dec 03 09:17 AM aarc wrote:

    > Re-structure GM once the global economy becomes less fragile or at
    > least already on the way to recovery.
    Reply | Link to Comment
  •  
    Dec 03 08:44 PM
    better get rid of the union clowns before it's too late.
    Reply | Link to Comment
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