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What the Government Learned From Chrysler

PH2009052104482.jpgWhen the government sent Chrysler into bankruptcy a few weeks ago, there was an argument going around that the move was basically a ploy to pressure GM's bondholders into cooperation. It was the government executing a hostage for effect. That no longer seems to be the case. David Cho, Peter Whoriskey and Kendra Marr report that the government is about to send GM down the same road. They write:

Under orders from the Obama administration, GM has offered to give the bondholders a 10 percent equity stake in the restructured company in exchange for giving up their bonds.

So far, however, the investors have resisted that proposal and if no accord is reached by June 1, GM will follow Chrysler into bankruptcy.

The speed with which the Chrysler bankruptcy has proceeded has given the administration more confidence that the best path for GM may be a similar trip, where the claims of disgruntled creditors and dealers can be more easily resolved.

The Chrysler bankruptcy, in other words, wasn't a ploy. It was practice. And it worked.

(Photo credit: David Zalubowski -- Associated Press)

By Ezra Klein  |  May 22, 2009; 12:00 PM ET
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I'm not surprised at all. The only talking point I heard against sending Chrysler and GM into bankruptcy was that folks wouldn't buy cars from a company in bankruptcy. And that one didn't stand up to any heavy rebuttal.

First of all, people fly bankrupt airlines all the time, where the stakes are quite a bit higher (your plane breaks down, it falls from the sky and kills you; your car breaks down, you pull over and call a tow truck).

Secondly, people weren't buying cars anyhow. If they already aren't buying Toyotas, then bankruptcy probably wouldn't significantly worsen the sales for GM or Chrysler.

Posted by: Rick00 | May 22, 2009 12:41 PM | Report abuse

If by "works" you mean creating a zombie Corporation and funneling billions of taxpayer dollars to Italian industrialists and feather-bedded union retiree medical costs, than yeah, it worked. If by that you mean having a company that will ever make any cars anyone will want to buy, then I'll have to disagree with you. This is going to be the american version of the Lada. This is the new Obamanomics: create dependencies for contituencies to build political power. Chrysler (or is it Fiatster?) will never be able to survive in a competitive marketplace and neither will the rebuilt GM (especially since you would have to be a damn fool to ever buy a bond from either reorganized company) and thus will be perpetually dependent on federal largess. So Obama will be able to build his new constituency at least until the money runs out. I'm thinking about 2014 or so.

Posted by: sgaliger | May 22, 2009 1:38 PM | Report abuse

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