The Showdown Over Chrysler and GM
GM is now likely to follow Chrysler into bankruptcy Monday. But the key issue is not whether it goes into bankruptcy, but what happens once it gets there.
The plan, according to both GM and the Treasury Department, is for GM to quickly sell its valuable assets to a new GM, a corporate entity that will inherit everything good about GM but not its crushing debts. The question is whether GM's creditors -- its bondholders -- will fight that plan in bankruptcy court and try to force the company into liquidation.
Bankruptcy is the accepted resolution process for a company that is unable to pay its debts, and GM has a lot of them -- primarily, close to $30 billion in unsecured bonds and a $20 billion obligation to a trust for retiree benefits. If a company defaults on its bonds, the bondholders can force it into bankruptcy.
Once in bankruptcy, however, the judge has the final say on what happens. In this case, the question will be whether the creditors could get more money by forcing the company to liquidate -- sell off its assets one at a time to the highest bidders -- or by accepting the government's plan to sell many of the assets to New GM.
The bondholders' chances of winning this fight depend in part on how many of them are willing to put up a fight, and so the government is trying to line up as many as possible on the side of its restructuring plan before the likely bankruptcy filing next week. In a game of chicken like this, it's usually in the interest of the bondholders to hold out for as long as possible in hopes of getting a better deal.
That is why yesterday they rejected the government's offer of 10% of New GM in exchange for the money owed them by Old GM. But the government seems to have pulled off a partial victory: By sweetening its offer (the bondholders will get up to 25% of GM, depending on how well it does), it has gotten the approval of an important committee of large bondholders. On its side, the government is saying that if it does not get the prior approval of a large proportion of the bondholders, it will cut its offer once GM is in bankruptcy.
The Treasury is breaking new ground here, and the only reason this strategy has any chance of success is that it seems to be working with Chrysler, where first it managed to twist enough arms to get the major bondholders to agree to a similar restructuring plan, and second the bankruptcy judge agreed in principle to let the government-backed restructuring plan go ahead. But the Chrysler hearings are going on this week, so we may not know until tomorrow whether the Chrysler asset sale will go ahead; if it fails, then all GM bets may be off.
The Obama administration will take heat for imposing too much government control over the auto industry, but in fact it is trying to tread a middle ground. It could have simply extended more and more bridge loans to the automakers or simply bought up the equity itself, using a combination of TARP capital and Federal Reserve loans -- but that would have aroused the ire of a Congress and a country clearly tired of bailing out banks.
Or it could have let GM and Chrysler go into an uncontrolled bankruptcy, but that would have created the risk of killing those companies forever. So in essence, it is choosing bankruptcy -- the free-market option -- but doing everything it can to make sure it comes out the way it wants.
The auto industry has rarely been as exciting as this week.
What do you think the government should do -- or not do -- about the struggling automakers? Leave a comment.
May 28, 2009; 5:10 PM ET
Categories: Autos , TARP
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