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blue bits. red rocks.
Wednesday 24 December 2008

I think those who assert that bankruptcy would be the best course for the US auto industry don’t understand the bankruptcy process very well. It can be a years-long process with every major decision requiring court approval. For example, United Airlines entered bankruptcy in December 2002 and finally exited in February 2006. But United was able to get “debtor-in-possession” (DIP) financing. In a typical bankruptcy, some party puts up the money to keep the company operating during bankruptcy and that debtor has first claim on the assets of the company. But DIP financing is not an option for the auto makers given the current state of credit markets. If the auto companies (and we’re talking here GM and Chrysler) entered Chapter 11 now without government backing, they would very quickly find themselves in a Chapter 7 liquidation. The US government is, in effect, the DIP lender of last resort. If the US government is the DIP lender, what’s the value of reorganizing the companies through a years-long adversarial litigation process with lawyers filing mountains of paper on behalf of all the various stakeholders in reaction to every proposed action? A bailout doesn’t mean the companies don’t have to reorganize. The current plan requires that the companies and their various stakeholders come up with viable plans of reorganization by March 31 – a timetable much faster than anything that could be produced through a Chapter 11 proceeding. Even if the plans that emerge only delay the demise of the auto makers by a few years, the bailout funds would be a wise investment to avoid the full hit to the economy at a time when it is teetering on the edge of the abyss. daggatt

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