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The Case For Chapter 11 bankruptcy
Posted by: McQ on Friday, December 12, 2008

Joseph Stiglitz, a Nobel prize winner in economics, says the best remedy for the US auto industry is Chapter 11:
What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.

Some will talk of the pension funds and others that will suffer. Yes, but that is true of every investment that has diminished. The government may need to help some pension funds but it is better to do so directly, than via massive bail-outs hoping that a little of the money trickles down to the “widows and orphans”. Some will say that bankruptcy will undermine confidence in America’s cars. It is the cars and carmakers themselves – and the dismal performance of their executives – that have undermined confidence. With industry experts saying $125bn (€94bn, £84bn) or more will be needed, with bail-out fatigue setting in, why should US consumers believe that a $15bn gift will do the trick of a turnround?
That's the short form of a) what the law is designed to do b) who will pay the price for their failure (as they should) and c) what the probable outcome will be ("carmakers in a better position") without d) federal bailouts and "car czars".

Why this is so difficult for those engaged in bailout mania inside the beltway right now to see is beyond me. They wrote the law, for heaven sake.
 
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I compared this to the airlines filing chapter 11 and a source in the industry explained it this way. The supply chains in the auto industry run much deeper than in the airlines.

It’s not just American auto companies that will suffer, even the profitable one’s will suffer. Many of the companies that supply parts are made at the same plant but sold to different manufacturers. They won’t be able to survive the Big 3’s Chapter 11, which will in turn hurt Honda, Toyota and so on.

Not sure I buy into it but the way he explained it certainly isn’t talked about on th news.
 
Written By: Blue
URL: http://
Exactly what I have been calling for McQ.

Blue,

The problem with that argument, and it has been made in many places, is that it is unlikely they can survive a restructuring any better. Whether through bankruptcy or not, they have to slim down. Bankruptcy just allows it to be done quicker and in a more orderly manner. If they can survive outside of bankruptcy it will be because somehow they managed to do exactly what they would have under bankruptcy. Outside of bankruptcy it is unlikely they will be able to do so, and it will be all the harder because the politicians will be screwing with the process and trying to serve other political interests.

For what it is worth, I think Waggoner knows that, he just cannot say so publicly.
 
Written By: Lance
URL: http://riskandreturn.net
The argument (the deep supply chain one) is ridiculous. The supply chain has been selling parts to companies that are losing money. Even fools know that can’t last forever (which is obviously why Congress thinks otherwise). They should have extracted themselves from this mess years ago by diversifying, etc.. I’ll bet the smarter ones did.

Hey, the glass makers in my town are experiencing a downturn, I guess we’d better break more windows so they can stay employed.

I feel sorry for all the people who, through no fault of their own, are going to be affected by this, but no one is owed a living, especially from unproductive enterprise.



 
Written By: Grimshaw
URL: http://
Restructuring would require capital, lots of it, to keep the ball rolling and prevent a cascade on GM’s suppliers. Basically they would still need billions. If the marketshare did suffer from the bankruptcy declaration that capital requirement would go on for a long time.

That capital would only come from the government and the government would still be in their business.
 
Written By: jpm100
URL: http://
The whole "supply chain would suffer / collapse" doesn’t make tremendous sense to me.

1. People will continue to need parts for the cars they have (and, if they own Big Three cars, quite a lot of them!);

2. If one or more of the Big Three disappear, then doesn’t that mean that the other car companies will have that much of a bigger market share which in turn will require them to build more cars which in turn will require them to increase their orders from suppliers?

I’m not saying that seeing GM disappear (which, under bankruptcy, they shouldn’t do) would be a "good" thing: a lot of people are going to suffer. However, I am not convinced that it will be the earth-ending catastrophe that some people (who have obvious ulterior motives) claim.
 
Written By: docjim505
URL: http://
GM could have issued massive layoffs. Saved cash and helped its PR case for a bailout. The problem is that the suppliers are living as close to the vest as the Big 3 are.

In order to be competitive, the auto company buyers have just been merciless to its suppliers. Standard orders were at one time to quote a new part, award the bid, and then talk the bidder down 30%.

The supplier base is quite bitter about this. Once upon a time, the suppliers could expect GM or another auto company to make owners of a manufacturer who got auto company business able to retire as millionaires. Corporate purchasing took an extreme harsh approach and probably over did it to a degree.

Anyway, if GM were to go to sleep for very long across the board to save cash, their suppliers would be in bankruptcy when they woke.

And considering GM’s bankruptcy experience with Delphi, I highly doubt they would be optimistic about seeing any more supplier bankruptcies.
 
Written By: jpm100
URL: http://
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Written By: 7
URL: http://anofzrcurako.com/

 
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