Big Three bailout or Ch. 11–truth vs. fiction

I listened with great interest to the testimony of the executivies from Detroit and the legislators the last couple of days regarding the Big Three request for a bailout from Washington.   I was particularly taken with the comments by the GM CEO that they have not seriously looked at a bankruptcy Chapter 11 scenario  because the market research revealed that consumers would not buy products from a company in “bankruptcy”.   He acted  like they had no plans whatsoever for considering such a course of action.  I found that amazing given the fiduciary responsibility he and the board has to the shareholders of the company.  After all that is who they work for and whose benefit they are supposed to be protecting.  Bankruptcy law and its operations happens to be something I know a little about having spent over 40 years as a specialist in that area of the law.   To say they over state the case of the downside of a Chapter 11 is like comparing a bb pellet to a 16″ shell from a battleship.   I understand the need for discretion in public comments but I think the matters now have gone well past posturing by the Management and Unions and straight talk is needed.

First, there are different proceedings in bankruptcy.  The Chapter 7 proceeding is for a straight liquidation of all the assets of the company and then a distribution to its creditors according to the priorities of the Bankruptcy Code.  Generally the shareholders are at the back of the line and lose everything and the unsecured general creditors are in front of them and behind the secured creditors and behind the taxing authorities.    That priority schedule is the same in Chap. 7 or a Chap. 11.   Unfortunately most people think of this proceeding in the Bankruptcy Court when they hear a company as filed for “bankruptcy”.  Technically, a Chapter 11 is not a “bankruptcy”.  It is a reorganization and rehabilitation section implemented to restore a company to health and maximize its payments to creditors, maintain its viability and retain value for its shareholders.   Some are failures and don’t accomplish the goal at all; others are partially successful and pay most or all of the creditors but value out the shareholders or seriously diminish their value.   I don’t have access to the books of GM but I would wager it is solvent at the moment and has very good prospects for being able to be profitable in the future.  The shareholders have a right to expect their board to do everything to protect and enhance their share value rather than knowlingly avoid a course of action that could accomplish that end.   Admittedly, Chapter 11 can’t make a silk purse out of a sow’s ear, but it can protect value and allow a company to reorganize its operations to maximize profits and thus pay not only its creditors but retain some value for the shareholders.  There naturally has to be a viable business to operate.  If you were trying to operate a buggy whip factory these days your chances for success would be pretty minimal because the demand would be zippo, no matter how good your product.

There is clearly a market for American made vehicles for all the Big Three.    To say they would have to shutter their doors if they don’t get the bailout money and that they couldn’t file a successful Chapter 11 is the height of irresponsibility.   There is now and always will be a substantial marker for SUV’s and trucks.  Remember that there are actually several million of us who do live west of the Hudson.  Civilization doesn’t really stop there even though some on the Upper West Side might think so.    California is one of the biggest markets for these vehicles because of it vast rural and agricultural spaces as are many of the other western, midwestern and southern states.  That market is there and will continue to be there and in fact the Big Three make great SUV’s and trucks.  Industries and transportation companies will need trucks.   The military will need Hummers.  There will always be a market for Jeeps, they are a great vehicle for their intended use.   And, of course there will be a market for fuel efficient family cars and smaller cars.  Point being that there is a market for American made cars.   Don’t forget too that there will be a demand for repairs and relacement parts.  That wouldn’t disappear overnight and there is lots of money to be made there.   People will continue to buy the cars while the Big  Three work out their Chapter 11proceedings.  For a price someone would want that American market share that will exist for at least decades.   After downsizing the non productive assets could be sold in an orderly manner.

A business model could be developed to show viability for all the Big Three.  They can make good products and sell them.  Yes, maybe their market share would drop substantially.  I don’t know how low but it would be there.  Collectively maybe they would only have 25% of the market in the future but that could still represent billions in annual sales and  thousands of jobs.  I won’t at this time go into all the details about how to work out a successful Chapter 11 plan but I assure one could be done.   Labor and management talk about all they have done in the last few years to reduce costs and become more competitive but you know what?  It is and was too little too late.  Sorry but there comes a tipping point and the industry can’t undue the damage of years of mismanagment and union greed overnight.   If the manangement and unions both take a really big, and I mean big, haircut on their compensation the industry could survive.  I would guarantee it.   It might be smaller and employ less people but it could be profitable.  Our American SUV’s and trucks are the standard for the world.  Our sedan’s and smaller cars can be built with the same quality as any others produced.   This industry can be saved but we don’t need the management and unions crying wolf and telling us it is the bailout or nothing but liquidation.  That is not honest and it is not factual.   They will have to file a Chapter 11 if there is not bailout or their shareholders would sue them from hell and gone and rightfully so.  They would have a very winnable case for such dereliction of duty.

Why should we tax payers have to foot the bill for others’s mistakes and greed?   They have a real and workable alternative in Chapter 11; they just don’t like the costs to management and labor.   Hey, there are things I don’t like either but I have to endure and move on.   A smaller more efficient and competitive Big Three (or Big Two) can emerge from Chapter 11.  Don’t for one minute believe the stories about it taking years to work out the Chapter 11; that is eyewash and a scare tactic for the uninformed.   It could be done in a matter of months at most.   To not start negotiating now with their constitutient creditors groups  is a violation of the duty of upper management and the board.   I have done the same thing many times over the years with substantial companies both public and private.   I wish as Debtor’s counsel I had had some of the inherent advantages of the Big Three going into the negotiations with creditor groups.  They can do it.   I hope Wall Street is smart enough to realize that an auto industry will be here  for the foreseeable future even if smaller.   Let’s not be suckered by the Big Three are those politicians in Washington pandering for votes or worse outright paying a “bribe” for future votes with your tax money.

Thanksgivng is looming and with all the negatives of the past several months it might do us all well to start thinking now about what we can be thankful for.  I know lots of folks would say that can’t think of much this year.  But give it some reflection, you may surprise yourself  and thinking of those joys in life will at least ease the pain of your 401.

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