With the news of recent days that the Government is seriously recommend that General Motors (GM) be prepared for a real bankruptcy has been met with mixed reaction. Some think it’s a good idea, some think it’s a bad idea. Certainly, a GM bankruptcy would materially impact many aspects of the overall economy and, probably hinder the recovery (though of course most talking-heads in the media believe its all “priced in”).
At issue is the most recent news whereby the U.S. Government is considering swapping about $13 Billion in bailout money that was lent to GM for a majority stake is a stripped-down version of the company (a.k.a. the ‘good’ GM). If this were to come to fruition, then the bondholders of GM, who currently lay claim to about $27 Billion in GM debt, would be effectively blown out. Previously bondholders were offered a 90% stake in the new, ‘good’, GM though the Government’s stake would significantly reduce that as their [Government’s] idea is to reduce the debt structure of the company by the June 1st deadline imposed on GM to come up with a viable plan.
The proposals on the table also include splitting up GM into two entities; essentially a ‘good’ GM consisting of the less crappy assets (likely Cadillac and Chevy), and another ‘bad’ GM consisting of the poor quality assets. The Government believes that GM can accomplish this via a “surgical” bankruptcy in as little as two weeks.
The idea that the Government would come in and take such a large stake in the ‘good’ GM and effectively wipe out the bondholders is preposterous, and should not be allowed. This would effectively nationalize GM, and we would have Government Motors, at least until the Government would sell of its stake (as it claims it will once the new ‘good’ GM starts operating profitably). The problem with the latter is it would not happen for a long time.
What will likely come as a huge surprise to the Government is that their idea of a “drive-through-bankruptcy” will be derailed once the matter hits the judiciary circuit. The Government will not be able to directly control the process and, the existing bondholders will certainly put up a fight in representing their interests.
My problem here is that the Government’s role, while important due to the fact that taxpayer money is at stake, is not being supportive (though they appear they are), rather they’re being forceful and effectively putting the company and the bondholders between a rock and a hard place. First it was forcing out the CEO; now they’re [Government] is putting the pressure on the bondholders to roll over, and next, when (not if) the bankruptcy ensues they will place a tremendous amount of political pressure on the courts involved to expedite this issue in favor of the Government’s interest.
I believe the best idea for GM is to perform some “self-surgery”. Though it would continue to impact the economy, GM should cut down one step at a time all of their “toxic” components. This should be accomplished in a formal bankruptcy proceeding with the assistance of a qualified trustee who can work out the issues one by one. This idea that we can get GM through this “express” bankruptcy is ridiculous and will only result in more layers of complexity and prolong the overall process of bringing this company back. That of course, assumes it should be brought back. Remember when Pan Am and TWA were the largest airlines in the world?
Sound Off:
What do you think is the best option to restructure GM? Do you think the Government is right in the action(s) it is proposing to take?
