The Obama team appears to be moving GM toward a quick, ‘surgical,’ pre-packaged bankruptcy, but parts of Wall Street remain deeply skeptical that it’s actually doable. Is this what one appalled financial outlet called “high-stakes brinkmanship”? John Voelcker reports from Manhattan.
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It sounds so appealing. Far from the uncontrolled chaos the industry feared last fall if GM and Chrysler lurched into “uncontrolled” Chapter 11 bankruptcies, the notion of pre-planned, swift, “surgical” filings—quick in, quick out—could resolve everything.
But the scale of a GM bankruptcy would be unprecedented. It would be so huge, with so many interlocking parts, that much of Wall Street remains highly skeptical it could work at all—even using Section 363 of the US bankruptcy code, which allows a judge to approve asset sales in an emergency over creditor objections.
That’s what happened in the case of Lehman Brothers, whose “stripped clean” core business was sold to Barclays over a weekend for the jaw-droppingly low sum of US$1.75bn. Wall Street widely views the Lehman “rescue” as botched, acting as the lead-in to further meltdown. (Given subsequent events, of course, reasonable minds may differ on whether that industry is particularly astute at assessing much of anything.)
The members of Obama’s auto industry task force have turned out to be very, very quick learners. They’re clearly far smarter and more perceptive than expected; last week’s assessments of the GM and Chrysler restructuring plans were short, terse, brutal—and utterly on point.
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By GlobalDataAn analysis last December suggested that if the US government provided debtor-in-possession financing after a GM bailout failed, it could take two years for a conventional bankruptcy to work its way through the system—precisely because all parties must agree.
Now, Obama’s team may be using the suggestion that GM prepare for Chapter 11 as a negotiating tactic. By threatening to split the company into a “Good GM” and a “Bad GM” under 363, they can strong-arm as many parties as possible to agree on a restructuring without actually having to go there. And analysts remain widely split on whether a 363 filing would work.
The good, the bad …
The lure of bankruptcy is that it would let GM salvage what’s needed for the future and dispense with the rest. Indeed, on Friday, GM’s new chairman, Kent Kresa, called the strategy “a great idea,” though—significantly—he also hedged by saying he thought GM could restructure itself without entering bankruptcy.
Section 363 would let a bankrupt GM sell selected assets to a new “good GM” that would use government funds to pay for them. The US government would take a stake in “good GM” that it would liquidate over time, offering taxpayers a significant upside (as it received 20 years ago from selling its stake in Conrail, which it helped assemble from six bankrupt northeastern railways). The proceeds from the sale would remain with “bad GM” to help settle pre-negotiated claims.
The “good GM” would include its two long-term global brands: Chevrolet (to compete with Toyota and Volkswagen) and Cadillac (to compete with Lexus, Mercedes-Benz, and BMW), along with its most modern plants and presumably most of the intellectual property and patents. It would also likely include at least some stake in the Opel-Vauxhall, GM-Daewoo, and Chinese units that—as Mark Bursa pointed out last week—design the bulk of the cars GM sells outside North America.
The “bad GM” would hold the bits that have dragged down GM for decades: irrelevant North American brands, US$27bn of debt, and perhaps its pension obligations. While Saab is all but dead, and Saturn and Hummer anxiously seek buyers, bankruptcy would let GM slice off its entire North American Buick-Pontiac-GMC channel without paying billions of dollars to buy out thousands of low-volume dealers selling brands that lost their way decades ago.
GM might even enter and emerge from bankruptcy on the same day, with all parties—creditors, bondholders, and unions—having agreed to support the “good GM” that would result.
As the theory goes, government guarantees on warranty work and parts availability would then reassure consumers that they need not fear buying from a bankrupt company. (Always assuming they can get credit in the first place, but that’s a different story altogether.)
Presumably “good GM” would be profitable from Day One, with fewer car lines, employees, and dealers, and far lower debt. We can only hope that the task force is modeling the P+L for a profitable “good GM” on assumptions that are more realistic than those that led the current company to its present state.
…and the ugly
As The New York Times dryly noted, “History offers almost no precedent for a GM bankruptcy filing,” pointing out that the US airlines and parts makers that have entered bankruptcy have nowhere near the size and “interconnectedness” of GM.
Yet the threat of bankruptcy gives GM and the government a far stronger hand in negotiations with two implacable foes: its bondholders, and the battered but still stubborn UAW. And this is where it gets ugly.
Thus far, GM’s bondholders have balked at writing down their US$27bn of debt to US$9bn, as demanded late last year under the terms of the first tranche of bailout cash. Anonymous insiders characterise bondholders as “stubborn” and “difficult.” Not surprising, perhaps, when faced with writing off two-thirds of the formerly safest financial instrument this side of a US Treasury note.
One unknown: No one understands the mix among bondholders. Is it still the pension funds and archetypal widows who traditionally held GM bonds? Or are large packages of bonds now held by vulture investors, who bought them for pennies on the dollar and plan to hold firm for an eventual profit by gambling that the government won’t stomach the pain of a real bankruptcy? Cynics tend more toward the latter notion.
As for the UAW, it has yet to agree to the bailout terms that require a substantial portion of the Voluntarily Employee Benefit Association—which must provide health care for its hundreds of thousands of retirees—to be funded with GM equity rather than cold, hard cash. And it represents many of the pensioners whose incomes would undoubtedly be slashed.
‘Surgical’ bankruptcy a ‘fantasy’?
But scepticism that any form of pre-packaged bankruptcy would work, no matter how well planned or “surgical”, runs rampant on Wall Street. A recent analysis by Naked Capitalist blogger Yves Smith calls the idea “fantasy” and “bizarre brinkmanship”.
His piece delves into a December analysis in The Deal that details the likely scenario for a GM bankruptcy assuming the bailout failed—an event so far averted by repeated short-term cash infusions. The piece argues that even under a firm bankruptcy judge, it would take two years or more for a slimmer GM to emerge from Chapter 11 shorn of the bad bits that weighed it down.
GM owes US$48bn to a staggering array of parties globally in well over a dozen different types of instruments, each of which comes with a separate set of regulations and legal venues. And of course the US government, as its newest and most important lender, will demand a return on the taxpayer dollars it provides before the rest see their first penny.
In bankruptcy, an official committee of unsecured creditors is appointed. Would GM retirees get a committee? Or bondholders? What about the dealer bodies? Shareholders, of course, whose equity would be wiped out, would get nothing—and no hearing.
A bankruptcy judge would likely be less sympathetic to union request for VEBA funding in cash—everyone else is sacrificing, retirees must as well—as well as to dealer groups coddled by the protective state franchise laws they bought through decades of political donations.
In the end, even pre-packaged, a conventional Chapter 11 would take a year to negotiate and at least another year to execute. A new GM might be expected to emerge in late 2010 or early 2011, right around the time its 2011 Chevrolet Volt electric-drive car lands in dealerships, adding a splash of optimism for the future.
Whose ox is being gored?
The complaints about brinkmanship ring hollow to industry analyst Aaron Bragman of IHS Global Insight, however. He points out that much of the criticism comes from parties—bondholders, bankers, even bankruptcy attorneys—who have something to lose from a quick, pre-negotiated Chapter 11.
“I don’t think this is brinkmanship in the least,” says Bragman. “The auto companies weren’t given time and operational cash for 30 or 60 days to strong-arm stakeholders into acquiescence; they were given this time to plan for a controlled bankruptcy.”
Bragman cites Chrysler in particular, which has to perform an almost impossible list of tasks. Among other To-Dos, Chrysler has been given just 30 days to revise and settle its deal with Fiat. If it can’t do that, the company will be allowed to collapse, says Bragman—after which Fiat’s Marchionne might still buy choice bits, perhaps minus those troublesome UAW workers.
“Bankruptcy is imminent” for Chrysler, says Bragman, and their 30 days is “time to create a bankruptcy plan that uses 363 to the company’s advantage, which is exactly what the government wants to see.” Bragman says GM has more time, and it will also have the benefit of seeing what happens to Chrysler. “Chrysler will be used as a testbed for a GM bankruptcy,” he concludes, “so all eyes will be on what happens at the end of April.”
Can they knock heads fast enough?
So the big test for Obama and his whiz-kid task force becomes to ensure that all the parties at the table agree to terms and sign on the line before a 363 filing, and that they hold to their bargain on the other side. And the team has to make it happen fast—if not by the original March 31 deadline, then within a matter of weeks afterward.
Aside from an uncontrolled bankruptcy, the worst outcome is a year or more of the government having to prop up GM with quarterly bundles of cash. With less than one-third of Americans saying the automakers should be bailed out, the public mood simply wouldn’t stand for that.
Sacking Wagoner—recent reports say he volunteered, understanding all too well the public anger that demanded heads on poles—was easy. But wrangling angry, high-powered negotiators from constituencies as diverse as fearful assembly-line workers, infirm retirees, and genetically avaricious bankers will truly put the whiz-kids to the test.
This is high-stakes industrial politics along previously uncharted paths. Another recent New York Times quote, from law professor David Skeel, was revealing: “The hope is that if we call it a controlled bankruptcy, that’s what it will be.”
Naked Capitalist Smith is scared. “This is very high stakes poker. If this gambit fails, the Administration … will likely feel compelled to withhold support, which will force a [bankruptcy], controlled or conventional”—with the associated destruction of the supply chain, and the potential shutdown of most US auto manufacturing for up to a year until alternate supply sources emerge.
Carnage better in the long term?
It’s worth noting that despite the short-term carnage of a GM collapse, global competitors may secretly believe it would be the better thing for the auto industry as a whole. Taking GM out of the system would go a long way toward addressing the global overcapacity that has plagued the industry for decades.
Still, slashing global overcapacity would let survivors raise prices on the increasingly expensive vehicles they build—unless or until China is capable of building competitive cars for export. Carmakers face growing regulations on carbon, safety, and other societal issues that continue to raise the costs of technical solutions, but that too is a separate story.
As for bankruptcy, many episodes have yet to play out in this grand, ongoing industrial drama. Or to quote the notorious Bette Davis: “Fasten your seat belts, fellas. It’s gonna be a bumpy ride.”
