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How Chapter 11 could work for Detroit
November 18, 2008
The view that the Detroit big three should be pushed into Chapter 11 bankruptcy, and not simply be bailed out by the US government, is growing.
The big three argument against this, apart from the general view that they only need a helping hand, is twofold.
One is that it is very hard to get debtor-in-possession financing at the moment to allow an orderly Chapter 11 bankruptcy to proceed. If they are not rescued, their argument goes, they face the harsher Chapter 7 bankruptcy, and chaotic liquidation.
The second argument is that any form of bankruptcy will be counter-productive because people will stop buying vehicles from any company in bankruptcy. They will not believe that any warranty or servicing agreement will be honoured in future.
The first argument is weak since the government could provide financing for Chapter 11 rather than trying to keep the companies going in the present form. That would provide more assurance that a big restructuring would take place.
The second argument has more weight, but not enough to be a barrier. Americans are already used to travelling on bankrupt airlines - although that involves a shorter-term contract - and, if all of the big three are thrust into Chapter 11 at the same time, any stigma would probably be reduced.
Andrew Ross Sorkin, the New York Times business columnist, comes down in favour of Chapter 11 this morning, and has an interesting analysis of how the restructuring of a combined General Motors/Chrysler might work.
It would involve shedding several brands, possibly including the Chrysler brand itself, and reducing capacity heavily. There are lots of entrenched interests that would fight that, notably GM and Chrysler dealers, but it has the ring of necessity.
Any help from the goverment should include a pay cut by all workers for the next two years. But I have not seen any indications from the unions that they are willing to help out.
Posted by: R. Porterfield | November 19th, 2008 at 2:15 am | Report this commentThe truth is that the Big three want to declare bankruptcy. The dirty little secret is that they have already shifted production to Asia, Eastern Europe, and Brazil and they are quite profitable in all of these markets.
Now they want to duplicate the Wilbur Ross strategy. He bought up a bunch of struggling steel companies (LTV, Bethlehem Steel) in the US in early 2000, put them in bankruptcy, dumped all the pension and medical obligations to the US government, and sold the new/consolidated International Steel Company to India based Mittal Steel for a HUGE profit.
The Bush administration does not want this to happen again. Wilbur Ross has nearly bankrupted the U.S. Pension Guarantee Fund and eliminated or reduced heath and pension benefits for a complete generation of U.S. retired workers.
The truth is these corporations will dump US legacy commitments to our workers and close more US plants regardless of if they get the bail out money or not.
Posted by: Adam Smith | November 19th, 2008 at 3:50 am | Report this commentSince the Republicans have the whip hand until the end of the year why haven’t they invited the CEOs of the Japanese, Korean and German car manufacturers in the South (still the GOP heartland) to come to Washington and make their case for equal treatment? They pay taxes too, to the tune of well over 100,000 well paid American workers, not to mention their parts suppliers, turning out state of the art automobiles.
Posted by: Tony Barnes | November 19th, 2008 at 9:04 am | Report this commentWhy not try the innovative strategy of making cars that people want to buy? That’s the main thing. Then Chapter 11 would make sense in order to help make them at a cost that people could afford to pay. But you don’t need the second thing if you haven’t got the first one right.
Posted by: Christopher Smith | November 19th, 2008 at 11:40 am | Report this comment[…] John Gapper blog Detroit and Chapter 11 […]
Posted by: Cezziunale, ma veramente: nu scuuup « de(e)pre(ce)ssion | November 19th, 2008 at 1:11 pm | Report this commentThe ‘Big Three’ have been mismanaged for decades. They produce cars which which represent a consistently declining market share and they have ‘given away the store’ to the unions. It is time to face liquidation. The U.S. economy will survive with out them and perhaps non ‘Big Three’executives will emerge to rekindle an industry that works.
Posted by: Gary Lumsden | November 19th, 2008 at 4:53 pm | Report this commentJoshua Ruah and Luigi Zingales set out in some detail the way in which they would hope to see Chapter 11 applied to GM; see:
www.voxeu.org/index.php?q=node/2574
Their scenario would surely apply to Ford also; Chrysler could then be let go to the wall, if the suggestion of Warranty underwriting as set out in the article is put in place (ie the Government to be underwriter).
Posted by: Derek Tunnicliffe | November 19th, 2008 at 7:08 pm | Report this commentWhat happens to my 401k if they claim bankruptsy?
Posted by: mike paget | November 20th, 2008 at 4:31 pm | Report this comment