What if the Big 3 declared bankruptcy?
TEXT OF INTERVIEW
Tess Vigeland: Media reports today say that Toyota’s president will step down next year. The news comes a day after the Japanese automaker announced its first-ever operating loss. So far none of the Big Three CEOs of Detroit have agreed to do the same, despite steering their companies into the ditch known as a taxpayer bailout. It’s supposed to help the automakers avoid bankruptcy, but we wondered how a bankruptcy would compare to the government rescue. So we asked bankruptcy expert Douglas Baird to join us from the University of Chicago. Welcome.
Douglas Baird: Thank you.
Vigeland: So what would the Big Three be forced to do if this were a normal, bank-run restructuring, versus a government bridge-loan or bailout?
Baird: Well, what you would need to do first of all is, you would have to figure out a way to get debtor-in-possession financing — typically you’d go to your most senior lenders and say ‘Look, we’d either like you to provide us with a bank roll for the bankruptcy, or you would give your blessing for us to go to somebody else’ — and you figure out before you file for bankruptcy how you’re going to pay your bills and satisfy suppliers… that they ship goods to you after you apply for bankruptcy, that they’re actually going to get paid. That’s the big number one problem that you need to think about.
Vigeland: And that is not part of the government’s current plan?
Baird: Well, actually in the current plan the government has this condition that says we have the right to be the debtor-in-possession lender, if you file for bankruptcy. Now it’s a little bit obscure in the matter of existing law — what it means for a lender to say they have that right — but the loan document as prepared, the term sheet, does contemplate the government is going to play that kind of role. Now the problem that a lot of people see with that is that it’s one thing for a private lender to perform the role of the debt financier, it’s quite another thing for the government to do it.
Vigeland: Well, when you look at what the government is doing versus what a bankruptcy court or a bank would do, how credible are the government’s demands from the Big Three in return for this loan?
Baird: Well the big problem, of course, is the government is giving the money first and then asking to make the changes, and that creates a problem. The second problem is that if you actually look at the biggest single issue these auto-deal companies have, it actually isn’t the trade unions anymore — they’ve made lots of progress there, they’re making more progress — the big problem is with these franchises. And it’s not obvious that outside of bankruptcy you can create the change in the dealer network that needs to happen, because there are a lot of state laws that basically make it impossible for you to get out of these dealer arrangements outside of bankruptcy; and it’s not a walk in the park inside of bankruptcy either, I should add.
Vigeland: Is it possible to take a look at the situation now with kind of this Band-Aid approach by the government and say whether this could possibly work or whether bankruptcy is inevitable, at least for one of two of the companies?
Baird: If you look at the term sheet and look at the way this is structured, it’s not obvious to me that there isn’t some recognition that bankruptcy is a distinct possibility. And it may very well be that what’s happening here is that you’re providing the financing, not so much because you think it’s going to work, but rather you think the financing will help you put these companies in situations such that three months from now, a bankruptcy won’t be as catastrophic.
Vigeland: Douglas Baird is a professor of law at the University of Chicago. Thank you so much.
Baird: My pleasure.
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