Fallout: The Financial Crisis

Is GM bankruptcy really a bad thing?

John Dimsdale Feb 18, 2009
HTML EMBED:
COPY
Fallout: The Financial Crisis

Is GM bankruptcy really a bad thing?

John Dimsdale Feb 18, 2009
HTML EMBED:
COPY

TEXT OF STORY

Bob Moon: Seems all these rescue plans, or survival plans — whatever you want to call them — all boil down to the same kind of question: Who wins and who loses? Or maybe more accurately: Who loses, and who loses less?

Today, some leading analysts were dismissing yesterday’s request for tens of billions more in government aid for General Motors and Chrysler. Some commentators even suggested they’re really trying to do what amounts to bankruptcy on the cheap, without actually going through the process.

So why are they trying so hard to avoid that “B” word — and would bankruptcy really be such a bad alternative? Here’s our Washington Bureau Chief John Dimsdale:


JOHN DIMSDALE: If car companies keep asking for government loans, Minnesota Republican Rep. John Kline knows sooner or later the holder of the purse strings — Congress — will start meddling in the car business.

REP. JOHN KLINE: I think that’s a poor way to run any business, to turn it over to a committee or committees in Congress to decide what is a sound business practice and what is not.

Like many in Congress, Kline thinks there’s a better way.

KLINE: A chapter eleven bankruptcy would let the companies do the serious restructuring they need to do. Many companies large and small have done very well, come out of Chapter 11 bankruptcy stronger and healthier than going in.

But the nation’s car companies strongly oppose a bankruptcy reorganization, where all sides — workers, dealers, part suppliers, bondholders — would be asked to sacrifice to save the industry. That sacrifice is frequently called a haircut. And David Cole with the Center for Automotive Research says a good example where that wouldn’t work would be auto parts makers.

DAVID COLE: No haircut is possible because they’re already bald. This is part of industry that is in very very weak position right now. There is nothing to give there.

Another problem, Cole says…

COLE: It is difficult to sell cars to people if you’re a bankrupt company. They’re worried about warranty, they’re worried about re-sale.

In yesterday’s restructuring blueprint, General Motors predicted bankruptcy would cost the government $100 billion in pension and health care costs for retirees who’d no longer be covered by the company. But one member of the White House Task Force on Autos was involved in the bankruptcy restructuring of the U.S. steel industry. That’s cause for some speculation the Obama administration considers bankruptcy a viable option.

In Washington, I’m John Dimsdale for Marketplace.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.