Wednesday, June 8, 2011

Blindfolded law professor swings and misses at the auto bailout pinata

University of Pennsylvania Law Professor David Skeel slams the government bailouts for GM and Chrysler by pointing out how they fell short of the implausible hypothetical utopian alternative resolution he envisaged in hindsight from his office on campus. 

Here is the article in the WSJ:  David Skeel: The Real Cost of the Auto Bailouts
Nor would both companies simply have collapsed if the government hadn't orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM's ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there's a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process.
Thats nuts. In March 2008, GM was bleeding $1 billion in cash every month and in August 2008 GM announced a $15.5 billion quartely loss. Future products were being delayed to keep the company on life support,  sales were far below the break even point, the whole economy was a train wreck, the housing crisis was blowing up, and customers were spooked by rumors of bankruptcy. GM's ability to obtain private financing for an organized bankruptcy at that time was beyond a serious question and closer to a pipe dream.  Here is a story from the pre-bailout era regarding GM's slim chances of securing the funding for reorganization.  CNNMoney: Why GM Can't Survive Bankruptcy
There is precedent for bankruptcy turnarounds. But those companies, filing under Chapter 11 of the bankruptcy code, were able to secure what is known as debtor-in-possession, or DIP, financing.  Lenders make such loans in part because bankruptcy law allow them to go to the front of the line of the company's creditors if the company is not able to stay in business. In turn, the bankrupt company uses the cash to make changes and return to profitability.

Without DIP financing, liquidation -- usually under bankruptcy Chapter 7 -- may be the only option left.   Experts in the field and even GM itself say that DIP financing might not be available for GM.
The only organization that had money to finance the bankruptcy was the US Government and that was only because they can print their own money.  They only got it through the legal system because they make the rules.  If the entire hot mess went into bankruptcy court under normal procedures it would have led to years of fighting over scraps and none of it would matter by the time they were done.  

Without the bailout packages, GM and Chrysler would have ended up in Chapter 7 liquidation.  So start the alternative reality there.  When you are done running that whole scenario down $14 billion will seem very small compared to what the losses would have been if the bailouts hadn't happened.

No comments:

Post a Comment