Wednesday, April 01, 2009

More on that "surgical" bankruptcy

An auto bankruptcy could cost one-third of the three million people employed in the industry and shave four percentage points from our GDP according to a Deutsche Bank analyst. I guess that's why Obama called it a "surgical bankruptcy" in his address on Monday. Losing that many people would be like losing a limb in order to save your life. That's the bad news.

There is some good news though, at least for GM. An article in the NY Times reports the "government may seek to ease General Motors into what it calls a “controlled” bankruptcy, somewhere between a prepackaged bankruptcy and court chaos, by persuading at least some creditors to agree to a plan that would cleave the company into two pieces."

This is how it would work:
Under a plan being worked out by the administration, G.M. would file for prearranged bankruptcy, according to these people. It would then use a sale authorized under Section 363 of the bankruptcy code to quickly sell off the desirable assets to a new company financed by the government. These good pieces might include Cadillac and Chevrolet, as well as assets the company needs to run the business.

Less desirable assets, brands like Hummer and underperforming factories, would be left in the old company. Proceeds from the sales, including stock in the new company, would be given to the old G.M., helping to settle claims.
I mentioned Section 363 bankruptcy the other day. The goal the administration seeks is to create a new, healthier, competitive G.M. by leaving behind its liabilities and less valuable assets, which is also similar to the way the government handled Lehman Brothers last year.

The administration would also have to win support from some of G.M.’s creditors, "notably the United Automobile Workers, which would be forced to pare its health care benefits and whose pension obligations would probably remain in the old company." That's bad news, but...
There will be pressure to keep plants open, to keep employment in communities high, he said, “because typically G.M. or Ford or Chrysler are very substantial contributors to the local tax receipt flow.”
They're telling us something we already know all too well. Experts are also saying history offers almost no precedent for a G.M. bankruptcy simply because no other company ever matched their size and interconnectedness.

The news for Chrysler isn't as good. Obama is prepared to let Chrysler go bankrupt and be sold off piecemeal if they can’t form an alliance with Fiat.

Bankruptcy is only at a possibility at this point, but it's looking likelier by the day - or at least within 30-60 days, and there's no doubt Michigan will suffer more pain if it happens. All we can do is trust Obama. He said he would direct a comprehensive effort to lift the hardest hit areas "by using the unprecedented levels of funding available in our Recovery Act and throughout our government to create new manufacturing jobs and new businesses where they are needed most – in your communities." He also said he would fight for us and help put us back on our feet. Things look bleak now, but not hopeless. With Obama helping us, we can come through this and be made whole again.


K. said...

Kathy, your coverage of this is much more informative and useful than the Olympian pronouncements of the op-ed columnists. (For example...)
No wonder newspapers are getting their butts kicked by the blogosphere.

Anyway, this must be painful for you, and I want you to know that at least one reader appreciates your efforts.

Kathy said...

Thanks for the kind words, K.

As for David Brooks, consider the source. Conservatives always want to bash blue collar industries that actually make something and aren't afraid of getting their hands dirty, and they accuse liberals of class warfare.

(And that's partially why newspapers are dying. Their reporting is written with that kind of slant. There's no sense in paying for a paper that insults us on a regular basis.)

abi said...

I think the auto industry is a perfect example of why Obama is always saying that the economic recovery and health care reform have to be done together. With the burden of health care costs that companies in other countries don't have, how can Detroit compete?

Detroit and the country are in good hands with Obama. I honestly believe he'll get us all through this mess unless the Republicans adopt a scorched earth strategy against everything he tries.

BTW, I second K's comments.

K. said...

Corporate America should be screaming for universal health care. That they aren't goes to show how knee-jerk ideology trumps pragmatism.

Kathy said...

Abi, after yesterday's vote on Obama's budget, it looks like the GOP is going with the scorched earth policy. Whey do they hate average Americans so much? For that matter, why do they hate our country that much?

I agree that health care is part of the solution, but will it help other industries? You know all too well that IBM has been shipping thousands of jobs overseas (while asking for stimulus money, the hypocrites). Do you think government provided health care would induce them to bring jobs back here? I'm not sure. I think shareholders and huge profits at all cost are part of the problem.

But aside from that, we need to reform health care because too many Americans are going without it, which is simply immoral.