I have written several times now why it’s in GM’s best interest that they declare bankruptcy. I have provided general reasons why. Steve Priestap, my husband, offers specifics why filing Chapter 11 is best for not only GM and Chrysler, but for any American corporation the Obama administration may target in the future.
The problem with selling your soul to the devil is that eventually the devil shows up and wants his due.
The current government takeover of General Motors, to the extent of the hiring and firing of corporate officers and the gratuitous guaranteeing of auto warranties, is an almost perfect illustration of why Chapter 11 of the Bankruptcy Code exists.
There is little doubt that GM is in need of the relief that is offered by Chapter 11. It’s the only way they can scare off the devil, which in this case is represented by the Obama Administration.
I’ve been a bankruptcy attorney for over 16 years in Ohio and Michigan, so naturally I have represented numerous members of the UAW. I have always been amazed at the generous retirement and health benefits that these workers were receiving. Some of them had been retired for decades and thus no longer contributing anything to the company they worked for, yet were still receiving a retirement check of several thousand dollars a month and very inexpensive health care. Much like the Social Security System, this is a formula that only works so long as a company is continuously generating a large cash flow. The moment the money spigot begins to sputter, this overly generous structure collapses like a house built on quicksand. Of course, the retirees and current workers are not sympathetic to the idea that benefits that they feel entitled to, and in some sense are, may have caused this financial calamity, but until the Big Three find a way to make these costs manageable it is doubtful that they can become viable in the long run.
The only way to achieve this goal responsibly is in Bankruptcy Court. Unfortunately, the Obama administration’s current approach of essentially acting like a court-appointed receiver and taking over the company is not only a dangerous precedent for excessive government, it is a very sloppy and imprecise way to reorganize a company. There are already indications that this “pre-packaged bankruptcy” (a better term would be “Executive Branch Receivership”) is going to be driven by political considerations and not the rule of law. One example: does anyone really expect the Administration, whose biggest supporter in 2008 was probably the UAW, to deal objectively with bloated worker and retiree benefits? Of course not. Obama will bend over backwards to accommodate his favored group at the expense of the company’s long term health. In other words, all sorts of considerations will be in play that have little to do with what’s in the company’s best interest. There is also a serious question as to whether the President even has any constitutional power to do things like guarantee warranties and run companies — a legal entanglement that’s probably waiting to happen.
Conversely, bankruptcy courts are bolstered by over two hundred years of well established rules of procedure and common law. Bankruptcy professionals and judges are far better equipped to deal with the issues that will arise, and they can do so without regard to political considerations. If GM seeks Chapter 11 relief, they will in effect be turning over control of their company to a bankruptcy judge, but there is a big difference: the judge is an expert and will have as his primary goal the survival of the company and the best possible outcome for its creditors. Since the judge doesn’t need to worry about whether the UAW likes him, he can order its contracts with the company to be re-negotiated, and will have final approval as to whether such agreements are in the best interests of the company. Does President Obama, or anyone in Congress, have any expertise in reorganizing a huge multinational corporation?
There may be legitimate concerns about whether consumers will want to buy cars from a company in Chapter 11 because of shaky warranties, but I think these fears are misplaced. In the first place, warranties issued after the filing would be post-petition obligations and thus outside the scope of the bankruptcy. Warranties issued prior to the bankruptcy could be effected, but these would likely be priority claims: that is, GM would have to honor them in order to have a feasible Chapter 11. The only way those warranties become endangered is if the company goes out of business under Chapter 7, but even if that happens I suspect that the assets that would be distributed to claimants in the liquidation could be used to satisfy the warranties. GM would simply need to make sure people understood all this, and provide plenty of incentives for vehicle purchases.
The fact is that there are enormous benefits available to GM or Chrysler should they enter Chapter 11. Their assets are protected, they maintain at least a reasonable amount of control over their own company, their fixed payments on most debt are suspended pending confirmation of a reorganization plan (saving billions annually in interest charges), and they will be able to obtain operating funds under what is known as debtor-in-possession financing. DIP financing provides lenders with super-priority status in a Chapter 11 and usually gives them secured status as well, which makes these deals very attractive to lenders. These loans have an extremely low default rate. I suspect that DIP lenders would be practically begging to loan money to asset-rich GM.
Bankruptcy courts exist for a reason. Companies that are able to turn a profit, but are crippled by long term debt and contractual obligations, are logical candidates for Chapter 11. The inordinate fear that the officers of GM and Chrysler apparently have of the bankruptcy court is not only misplaced, it is probably suicidal. If they want to save their companies, they will politely tell the Obama Administration that it has no business telling them what to do, that they still have rights under the Bankruptcy Code and the Constitution, and will immediately exercise those rights by filing Chapter 11. If they fail to do this and instead participate in some sort of ad hoc government-sponsored reorganization, they will not only be making a poor business decision, they will be helping to set a very bad precedent for every business in America.