A blank check won’t work, because General Motors (GM), Ford (F), and Chrysler will just be back for more (a lot more). A “car czar” won’t work, because the person will have no real power. A liquidation will nuke the economy and clobber thousands of Americans who aren’t in any way responsible for Detroit’s plight (this is still the option that Clusterstock readers prefer). So the best option is a form of prepackaged bankruptcy:
- Government agrees to provide DIP financing, senior to all other creditors
- Car companies get concessions, cut costs, etc.
- Stockholders get zeroed
- Bondholders get hit hard
- Managements out
- At government’s option, if restructuring seems viable, DIP loans partially convert to equity
- Companies emerge quickly from bankruptcy with vastly reduced debt obligations, restructured costs, smarter product lines.
Even this will be challenging to pull off at this point because the companies (and government) have wasted so much time. But it’s the best option, especially for General Motors. Ford can try to hang on a while longer.
More from the FT’s LEX:
Beneath Detroit’s bluster that bankruptcy is “not an option”, media reports suggest that carmakers may now accept a “pre-arranged” reorganisation. Many bankruptcies are involuntary and result in either Chapter 7 (liquidation) or Chapter 11 (reorganisation). The latter can be negotiated ahead of time. For example, oilfield services company Halliburton put its KBR subsidiary through a prepackaged reorganisation after being overwhelmed by asbestos litigation. This can be far cheaper and might avoid spooking customers since re-emergence is fairly quick.
But there is scant time left now for workers, bondholders, unions, dealers and suppliers to all agree on concessions. A messier, lengthier and more expensive prearranged deal is more likely without the requirement for universal agreement. Congress could remedy one pitfall of a prearranged deal, at little risk to the taxpayer, by providing “debtor-in-possession” financing to carmakers and suppliers in reorganisation. This low-cost funding is senior to all other claims and would leave taxpayers with little risk. Alternatively, an 11th-hour bail-out might still buy time for a negotiated restructuring. But Detroit’s recent hard-headed tactics suggest a bankruptcy judge would get far quicker results.