To be honest, when we first read that General Motors was predicting that a bankruptcy restructuring would cost $100 billion we thought: oh, well, let’s do it then. After all, GM has already asked $45 billion from the Treasury Department and the Energy Department and it is likely to be back for more. Some have estimated that saving GM might cost as much as $125 billion. If we can just put this thing down for $100 billion and be done with it…well, there’s a certain appeal to that.
Others, however, are more sceptical of the $100 billion number. The automaker says it reached that pricetag by estimating a fall in sales of between 50% and 80% following a bankruptcy, causing a catastrophic drop in revenue. But many think these dire predictions are just scare tactics.
In fact, that’s exactly the term used by Antony Currie of breakingviews.com, who calls the $100 billion figure the “mother of all scare tactics,” designed to convince politicians and the public that bankruptcy will be the death of the automaker. My personal experience working as a finance lawyer gives me some sympathy with Currie’s position. Back in my former life, I worked with bankrupt health care companies and bankrupt nursing homes that managed to emerge with thriving businesses. If patients will seek care from a bankrupt hospital, if people will put grandma in a bankrupt nursing home, won’t they buy a car from a bankrupt car company?
The shiny new Bankruptcy Beat blog at the Wall Street Journal runs through a bunch of sceptics of GM’s scare numbers:
Currie says GM and Chrysler, which estimated its own bankruptcy would cost as much as $25 billion, are relying on “a couple of short research reports” to make their case that bankruptcy would cause consumers to abandon U.S. auto makers.
Ed Altman, a bankruptcy expert and professor at New York University’s Stern School of Business, told the New York Times that the $100 billion figure could be a “ploy so they will not be forced to file.” When GM and Chrysler went to Washington last year with their hats in their hands, Altman testified before Congress in favour of a government-backed bankruptcy.
Paul Ingrassia, The Wall Street Journal’s former Detroit bureau chief who shared a Pulitzer prize in 1993 for coverage of GM, points out that GM’s requests for “nearly $45 billion from the Treasury Department, the Energy Department and friendly foreigners gets us almost halfway to $100 billion, even if the company doesn’t request more money down the road — which one suspects it will.”
Ingrassia says the damage to the auto makers’ sales has “been done.” Bankruptcy, he writes in Thursday’s WSJ, “will improve their chances of survival by relieving them of financial obligations that they can’t afford.”
And over at The Atlantic Magazine’s Business Channel, Megan McArdle thinks the $100 billion may just be blackmail.
Can anyone explain why GM and Chrysler say they’ll need $100 billion and $25 billion in financing respectively if they have to file bankruptcy, but far far less if they stay out under the latest hat-in-hand plans they’ve brought to DC? The enormous difference in magnitudes feels like it’s part of Detroit’s rhetorical blackmail to get the fix it wants (i.e. not bankruptcy), but maybe I’m missing something.
The two important questions, then, are:
- Is GM right that the bankrupcty will actually cost as much as $100 billion?
- Will saving GM actually cost less than the $100 billion.