GM Bankruptcy Option Under Discussion

By: Mike Shedlock | Thu, Dec 4, 2008
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Bloomberg is reporting GM, Chrysler May Accept Bankruptcy to Receive Bailout

General Motors Corp. and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multibillion-dollar government bailout, said a person familiar with their internal discussions.

Auto executives have warned bankruptcy would lead to liquidation as customers abandoned the companies. Staff for three members of Congress have asked restructuring experts if a pre- arranged bankruptcy -- negotiated with workers, creditors and lenders -- could be used to reorganize the industry without liquidation, a person familiar with that matter said.

House Speaker Nancy Pelosi and President George W. Bush are at odds about how to help automakers after both agreed that allowing them to enter bankruptcy is a bad idea. GM, Chrysler and Ford Motor Co. asked for $34 billion in bridge loans, about one- third larger than the $25 billion Energy Department loan program the White House has previously supported to finance more fuel- efficient cars.

GM Chief Executive Officer Rick Wagoner said today that bankruptcy is not in his plans. Such a filing would mean liquidation because customers would refuse to buy cars from a company that might not be able to back warranties or supply parts, he has said. Bankruptcy is "way down the list of options," board member George Fisher said yesterday in an interview. GM spokesman Tony Cervone declined to comment beyond Fisher's remarks.

Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles, said Democrats' goal of preserving a U.S. auto industry is not doable without a bankruptcy.

"A workout requires everybody's agreement," LoPucki said. "If I own bonds, GM can't force me to take less than 100 cents on the dollar outside of bankruptcy court. Bankruptcy is the only thing that can work because GM and the government need the ability to force people to go along with the plan. Paying everyone in full is prohibitively expensive."

"Billion-dollar companies rarely go into bankruptcy and liquidate piecemeal," he said.

The government could guarantee the warranties given to consumers on cars bought from a bankrupt automaker, said Mark Bane, a bankruptcy lawyer with Ropes & Gray in New York. Government money could also "ensure that parts suppliers will be paid," he said.

Less government money would be needed in a prepackaged bankruptcy, which might last only two months, compared with two years or more for a regular bankruptcy, according to Bane. In a "prepack" restructuring, an automaker would go into court after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed.

Government aid might be needed only for the period during which the company is gaining consent from its constituencies -- which might take as long as six to 12 months, Bane said.

A representative of Obama's transition team earlier contacted at least one bankruptcy law firm to say Daniel Tarullo, a law professor at Georgetown University who heads Obama's economic policy working group, would call to discuss the workings of a prepack, according to this person.

Time To Be Practical

The option for a prepackaged bankruptcy is on the table. It will be the best we can hope for at the least taxpayer expense. We need to push that option. Here goes.

Support A Prepackaged Bankruptcy

We need to Call, write, and Fax Congress and tell them the best approach is prepackaged bankruptcy. It will be the only way for management and unions to do what is necessary to restructure costs to be competitive going forward.

This is not the best solution. As a practical matter, it is the best solution possible.

Here is the first thing I want you to do:

Call your representatives and say ....

A prepackaged bankruptcy is the best option on the table. It offers the lowest cost solution and only way for management and unions to do what is necessary to restructure costs to be competitive going forward.

The airlines survived restructuring so can the automakers.

Next it's time for a Fax Campaign.

Congressional Phone And Fax Numbers

Click Here For Congressional Phone And Fax Numbers

Click Here For MetroFax Compatible Fax List For All Congress

Message For Congress

Fax Title: Prepackaged Bankruptcy Is Best Option On The Table

Dear senator/congressional rep

A Prepackaged Bankruptcy Is Best Option On The Table

Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles, said the goal of preserving a U.S. auto industry is not doable without a bankruptcy.

"A workout requires everybody's agreement," LoPucki said. "Bankruptcy is the only thing that can work because GM and the government need the ability to force people to go along with the plan. Paying everyone in full is prohibitively expensive."

"Billion-dollar companies rarely go into bankruptcy and liquidate piecemeal," he said.

The government could guarantee the warranties given to consumers on cars bought from a bankrupt automaker, said Mark Bane, a bankruptcy lawyer with Ropes & Gray in New York. Government money could also "ensure that parts suppliers will be paid," he said.

Less government money would be needed in a prepackaged bankruptcy, which might last only two months, compared with two years or more for a regular bankruptcy, according to Bane.

Listen To Bankruptcy Experts Not Auto Execs

I support the conclusions of Lynn LoPucki, who teaches bankruptcy law at Harvard University, and Mark Bane, a bankruptcy lawyer with Ropes & Gray. GM and the auto executives are simply not believable or objective about alternatives.

Two weeks ago, the automakers said they needed $25 billion to survive. Now they need $34 billion. How much will that be next month?

GM alone needs another $6 billion now ($4 billion immediately) than it did two weeks ago. How much will it need next month?

How can anyone believe anything the auto executives are saying?

There is no hope for the automakers other a restructuring of debt and a prepackaged bankruptcy plan is the best way to ensure that happens.

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When writing your own rep, put in your address and phone number.

 


 

Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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