Bankrupt Bankruptcy

18 September 2009 at 7:45 am glennmmacdonald 3 comments

| Glenn MacDonald |

The US bankruptcy process is designed to be an orderly way to preserve any value that is left in the bankrupt business, and treat the creditors fairly and consistent with their contractual rights. This process has been honed through use and generally functions highly effectively. The point of preserving value is obvious enough. Fair treatment of creditors is not about fairness per se, but rather about investor investor protection generally, i.e., in the US, to promote efficient credit markets, investors are generally well protected, including in bankruptcies. The recent GM bankruptcy is an interesting case of how this process can be made to fail, mainly through rushing the process and dictating its outcome rather than by letting the process do what it was designed to do.

Specifically, much value was wasted. For example, among car aficionados, there are few brands more revered than the Pontiac GTO; this persists despite the weak offering brought out in 2004. Where is the GTO? On the scrap heap with the rest of Pontiac. A more deliberate bankruptcy would have preserved this value, e.g., by folding parts of Pontiac into Chevrolet. Second, GM’s creditors rightly claimed they were wronged by allowing the sale of all good GM assets to the new GM, owned mostly by the government and the UAW, and denying them the rights to argue their case to the bankrupcy court. They correctly argue they were robbed.

Who are the main beneficiaries of this mess? To the extent that despite the poor reorganization, GM is actually worth something, obviously the Federal government and the UAW benefit from the treatment of creditors. But more importantly, this is terrific for GM’s competitors, who have much to gain from GM’s remaining value being wasted through a weak product line, politically driven lack of cost reduction as inefficient facilities are retained, etc.

Entry filed under: Bailout / Financial Crisis, Corporate Governance, Former Guest Bloggers.

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3 Comments Add your own

1. gpeters | 18 September 2009 at 9:35 am

I wonder if the Federal Government would now claim that GM can be more competitive and provide a good deal for consumers “by avoiding some of the overhead that gets eaten up at (Ford and Toyota…) by PROFITS (emphasis added) and excessive administrative costs and executive salaries {from Obama’s arguments on health insurance overhaul}” (wink) Watch out Toyota!
2. AGMycroft | 18 September 2009 at 11:01 am

Nobody in their right mind would ever be willing to lend money to the auto industry with the quaint idea that they might either recover part of their capital — or at least end up with equity control — in case inherently risky business results fail to repay the entirety of the debt.

Well-capitalized rivals (hello, Toyota!) will LOVE the fact that the debt market will be forever closed to US automakers unless the government is willing to guarantee principal repayment. Even the AIG fiasco pales in comparison to the message this sends to the capital markets: the USA is not a safe place to lend money. The cost of financing with 100% equity will be RUINOUS for the remains of the auto industry…and other asset-heavy businesses will suffer, too.

Period.
3. John B. Chilton | 22 September 2009 at 10:30 am

Hi, Glenn. (Where’s the full disclosure about your attachment to General Motors? (smile))

Regarding the GTO, I wonder if you’re not being premature in declaring it’s been consigned to the scrapheap of history. To consign is commit forever. GM still has the opportunity to bring back the GTO, internally, or by consigning it to another party.