Tuesday, November 11, 2008

GM should go bankrupt

Its market cap is down to $1.8b. So shareholders lose $1.8 billion. Spread out as much as it is, that's not much. The damage has already been done.

A lot of people seem to think that declaring bankruptcy requires the company to stop operating. This is completely wrong. United Airlines just spent three years in bankruptcy. People arguing for a bailout are doing nothing to correct this misperception. Shame on you. That includes you, Barack Obama.

The argument goes that $25 billion in guaranteed loans will give GM the space it needs to clean its house and start producing vehicles that can sell without huge discounts. They're essentially arguing that their problems are not structural, but temporary. Let's agree that is true (though I think it is not.) So what? Why can't you do what needs to be done in Chapter 11 bankruptcy? Okay, maybe you need credit extended so you can actually make it through bankruptcy. I'm cool with the government guaranteeing that. However, this debt will be most senior, so if GM doesn't make it and gets liquidated, those debts will be paid first. So, that government guarantee wouldn't be needed.

It really comes down to politics. Bankruptcy will invalidate all the union contracts and all the leverage will be held by GM's creditors. A judge will be in place to make sure things go smoothly and to bless a final plan. Bankruptcy will effectively break the union. The labor contracts will essentially be negotiated from a tabula rasa. It is not improbable that the workers would decertify the UAW and form a new union. This may just be what GM needs, but it certainly terrifies the UAW.

I am against any bailout. The only real argument that I've heard for a bailout is that no one will buy a car from an auto manufacturer in bankruptcy because of warranty concerns. Hogwash. If people were willing to fly on a bankrupt airline, they'll buy cars from a bankrupt auto manufacturer. GM should go into Chapter 11 and reorganize there. Even if their problems are not structural, they cannot afford to add $25 billion of debt to their balance sheet. If they are structural, bankruptcy is the only way they can actually address these problems in a meaningful way.

Barack Obama cannot do anything but push for a bailout. His coalition is fragile and he needs the unions to back him. Maybe the Republicans can stay unified enough to block it. They could filibuster it and kill it. However, the implications for the next battle are not so great. We need a tremendous amount of government stimulus and we can't afford to let the Republicans block that. Also, Obama can't really allow the Republicans get the idea that they can beat him. He's got a tough job. The right thing to do is kill any talk of a bailout, but the right thing risks seriously damaging his ability to govern. This should be interesting.

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