The ratings agency Moody’s Investors Service gets, well, a bit moody about the “bankruptcy is no option” outlook favored in certain Detroit circles. Moody’s says the odds are 4:1 against that happening, Automotive News (sub) reports.
Moody’s said there is about a 70 percent chance of a prepackaged bankruptcy coupled with government assistance. Moody’s graciously places these odds on all three Detroit automakers.
A government bailout without a bankruptcy, Detroit’s favorite, is given just a 25 percent chance.
Detroit will find solace in the fact that Moody’s sees just a 5 percent chance of a “freefall” bankruptcy without a prepackaged plan.
“We think it’s most likely that a prepackaged bankruptcy filing coupled with government financial assistance will be needed to restructure the Big Three,” Moody’s Senior Vice President Bruce Clark said in a statement.
Well, duh! Good that Moody’s now seems to have half a brain. Where were they before??
Filing Chapter 11 is easy. Emerging from Chapter 11 is quite another, particularly when there is no viable plan for doing so.
Getting the Chapter 11 approved by creditors who don’t believe in the plan and/or have no desire to wait around for it is a different thing entirely.
Chapter 11 made sense when the economy was moving along and when GM had enough internal resources to fund it. Now that the taxpayer has to pay for it, there is no credit and GM has sold off just about everything of value, it is no longer such a terrific thing, unless you bought the bonds recently for 15-25 cents or happen to be a bankruptcy attorney.
Wake and smell the coffee, folks — a Chapter 11 filing will mean that at the very least, your money will go into the pockets of bondholders and the very same banks that benefited from TARP. You will be paying them a premium to go restrain themselves, so that they will accept a plan that isn’t going to work, anyway.
Pch101 :
Right, giving the bondholders (even those who bought at 15-25 cents on the dollar) the full face value of their bonds, not getting rid of any dealerships and not getting rid of the crushing UAW work rules, Job Banks and benefits with a full scale government bailout is a much better option.
“Filing Chapter 11 is easy. Emerging from Chapter 11 is quite another, particularly when there is no viable plan for doing so.”
What there is no viable plan for is every making the big-3 profitable again without the kind of debt and liability elimination that can only come with a Chapter 11 Reorganization.
As a Canadian you have much less of a stake in this since your tax dollars aren’t being flushed (at least not unless our are first), but you should be much more familiar with British Leyland.
I can only hope that Moody’s is better at predicting Treasury actions than rating debt.
Chapter 11 will be anything but smooth once the OEM suppliers hit the skids and declare bankruptcy as well. 2009 will be a year to be remembered for a generation.
There is no C11 for GM.
Sell the pickups to NewCorp. Sell the Malibu and Vue back to opel. Sell the Pontiac Vibe to Toyota.
Then shut down EVERYTHING else in NA.
C11 only works when people are buying cars. Based on November sales, GM is going to sell 1.8 million cars in the US next year. Regardless of how people feel about buying cars from a bankrupt company (and it will be negative) 1.8 is not enough to restructure. You could go as low as 1.2 – 1.3 depending on how BK plays out with consumer markets. Banks will be less willing to extend car loans for cars that depreciate quicker b/c of lack of warranty protection.
What there is no viable plan for is every making the big-3 profitable again without the kind of debt and liability elimination that can only come with a Chapter 11 Reorganization.
It’s a huge mistake to assume that Chapter 11 is sufficient for making them profitable. Ironically, this mistake buys into the same tired shtick that Rick Wagoner has been selling for years.
Reducing the liabilities is not nearly enough. A plan that doesn’t address the cultural problems and the unwillingness of the marketplace to pay retail prices for these vehicles is not a viable plan. You’ll just be using the taxpayer’s money to provide money that will never be repaid.
At this point, this is just as much of a stall tactic as the bailout, except it will be even more costly because we will get to pay for shutting down the brands, paying off the bondholders, and the rest of it.
The taxpayer will be financing the downsizing that GM should have done before, while getting none of the upside because we don’t have that kind of time. It will be expensive, and it isn’t going to work. This is a waste of my money, and it will give the Detroit defenders a big “I told you so” when it fails, even though they were part of the failure.
Pch101:
The way that Wagoner, etc., cut costs was by under developing and under engineering their cars. They were not able to cut dealership or labor costs because of state laws and labor contracts. Only Chapter 11 will allow for those necessary costs to be cut so that money can be spent on the engineering and development of Chevys and Cadillacs to be produced by a lean, efficient workforce.
If the government simply puts GM on life support it will go on the same; development will be cut to pay for marketing eight brands and paying unnecessary workers. Engineers will be the first to go since they have no state laws or union contracts protecting them.
Chapter 11 might allow the big-3 to compete against the Japanese, who have fewer dealers, fewer brands, and the flexibility to lay off unnecessary workers. Or Chapter 11 might not work.
A non-Chapter 11 bailout is sure to lead to British Leyland. The is no possibility that it will work.
And I think you are confusing US Bankruptcy law.
Outside of Bankruptcy the government will have to pay the full amount to bond holders and dealers, and fully honor the UAW contracts, including the Jobs Bank and work rules, otherwise it will be considered a Government “taking”.
Inside of Bankruptcy the government does not have to give anything to the bondholders or dealers, they are just unsecured creditors.
The way that Wagoner, etc., cut costs was by under developing and under engineering their cars.
GMNA has done this for decades. There is absolutely no evidence that reducing wages is going to spark a renaissance in engineering.
If the government simply puts GM on life support it will go on the same, development will be cut to pay for marketing eight brands and paying unnecessary workers.
Feel free to make that argument to someone who is supporting a carte blanche bailout. I am not doing that.
It would be helpful if people would move beyond an either-or mentality in these discussions. There are options available aside from the Detroit and Republican versions of the plan. Both plans to be destined to fail, and the Chapter 11 version is ironically more expensive because of the money that will be needed to support a reorganization.
Inside of Bankruptcy the government does not have to give anything to the bondholders or dealers
The unsecured creditors also get to vote on the plan. It is possible for the court to cramdown the plan on the creditors, but that does not mean that the bondholders won’t go down fighting.
Corker was proposing paying 30 cents on the dollar. That price will generate huge returns to any speculators who bought the bonds in recent months. If you paid 15 cents for paper that gets repaid by the taxpayer at 30 cents, you will have made out like a bandit.
“b/c of lack of warranty protection” -snabster
Reference the multitude of editorials on the subject of bankruptcy. All plans discussed here included a request to fund a warranty piggy bank and automatically authorize the payment of warranty claims. This request would be made and approved on the same day as filing therefore there would be no lapse in warranty coverage.
@Pch101: as no_slushbox points out, what is the alternative? a no-strings attached government bailout? How exactly will that allow them to survive and be well positioned in a 13M unit market place?
Pch101 :
“Feel free to make that argument to someone who is supporting a carte blanche bailout. I am not doing that.”
From your comments I know you don’t, but those are the only real options.
Either the current administration forces a Chapter 11, or the next administration will do a full bailout that will never end and never be repaid.
The creditors are large institutions that have a large stake in the overall economy and suppliers that need GM as a customer. If the government has the nerve to force a real Chapter 11 (not the fake thing Corker was proposing) then the creditors will have to take it. It’s better for the creditors than a Chapter 7.
what is the alternative?
I have argued on this website that GM’s assets should be sold off in a government-brokered deal to other auto companies (almost certainly foreign) that could convert what is left of it into a smaller, hopefully profitable version of it with new management, with most of the remaining liabilities put into Chapter 7. Breaking it up into pieces might play a role in such a plan.
In the alternative, I would bail them out just long enough so that their collapse is delayed long enough that they can fail without harming the stock markets or harming the beginnings of the economic recovery. The purpose of the bailout would be to prioritize damage control for the sake of the economy, and would limit the use of resources just enough so that they can limp along until the crash landing causes less damage.
While the second version is less appealing, it would be cheaper than a full-blown restructure plan, which could run into the tens of billions of dollars.
I would let Chrysler go entirely. If the government punts on Cerberus, they will sell off the company to save their private equity business, and as a privately-owned business, it can fail without hurting the stock markets, at least not directly. I think that you’ll find Nissan buying up at least some pieces of it.
You mean to tell me that a judge, most likely in Michigan, won’t sign off on a restructure? I don’t think the plan has to be all that great, just good enough to LOOK like the company will be viable for 3 to 5 years, and it will pass.
I am not a lawyer, nor am I all that familiar with the process, but I just don’t see this being that hard to get past a judge. It’s like going to court to re[resent recent widow and her kids, how are you going to lose?
Ed S. :
December 16th, 2008 at 12:46 pm
“b/c of lack of warranty protection” -snabster
Reference the multitude of editorials on the subject of bankruptcy. All plans discussed here included a request to fund a warranty piggy bank and automatically authorize the payment of warranty claims. This request would be made and approved on the same day as filing therefore there would be no lapse in warranty coverage.
Yeah, but there’s still a PR problem. That is, the problem is that people won’t buy from a bankrupt automaker not because there will be a problem getting warranty claims paid, but because people will think there will be a problem getting warranty claims paid. With a car costing twenty, thirty, forty grand, why take a chance?
You mean to tell me that a judge, most likely in Michigan, won’t sign off on a restructure?
Not quite. I’m saying that it will cost a fortune to the taxpayer, and it still isn’t going to work.
A prepack will be particularly expensive because the bondholders and banks will hold out for maximum payout, they know that the case won’t get filed without their support. Since they know that Uncle desperately wants it to happen, the deal won’t be done at a bargain price.
The beauty of Chapter 7 is that there is no negotiation. Every creditor will get shafted and they will have to squabble over whatever pieces are left. From our standpoint, we don’t even have to care how they do. The creditors will have zero leverage to negotiate, which is quite the opposite of either a prepack or this government-sponsored quasi-bankruptcy-that-isn’t-quite-a-bankruptcy.
I can predict what would happen in either an 11 or under Corker’s version. First, we get spanked on the cost of the prepack. Then, sure enough, we find out that whatever we put in wasn’t enough money, since nobody wants their cars, anyway.
To preserve the money that we’ve already put in, we will add even more money, none of which will have helped to sell a single car. So we’ll have doubled down on a losing hand.
All of these reform efforts are expensive. Shutting down brands could alone cost several billion dollars, without adding a penny in revenue. The dealers will be especially motivated to sue when they know that Uncle is there to pay the settlement. The bondholders will want 40-50 cents, since Corker was already dumb enough to offer them 30 cents.
This is a never-ending money pit. If GM ends up with lower labor costs and still substantial losses, how does that help us?
My take on Detroit’s future is different. I see a viable future by 2010 for a slimmed-down GM (Chevrolet and Cadillac.) Chrysler is another story. Basically bled dry of saleable vehicle lines (with possible exception of some Jeeps), it will probably be parted-out (Jeep, Dodge trucks and minvans to Nissan/Renault, Chrysler brand and factories to Chinese or Indian car makers or else allowed to fade away.) Ford looks good on paper, even better if Volvo can be sold and Mercury jettisoned. With the US (and then world) economy on the mend by 2010, Ford and GM should do pretty well in the recovering (and less domestically competitive) car market. Voyons nous…
I agree completely with Pch101. There is no solution to this puzzle.
There is no way government (any shape or form of government) can appoint a lawyer who will be better qualified then existing management. Existing management could not solve this problem. Classical Catch 22.
I still don’t know how GM could possibly be saved…especially after I checked out Google Finance to look at their numbers.
Thanks to TTAC I knew that their cash-flow was in the gutter, but the most alarming number was their total equity, which as of the third quarter has dropped to $-60 billion.
How could they possibly avoid Chapter 7 with that kind of equity? (Especially combined with their negative cash flow.)
No one has yet to inform me how all the mentioned possible scenarios affects Rosie the Riveter’s pension.
“No one has yet to inform me how all the mentioned possible scenarios affects Rosie the Riveter’s pension.”
Sooner or later, it gets hosed. If GM goes away completely, the Feds are on the hook, funding them from the reserve fund set up for that purpose. The result of a total GM default would be a rapid draining of the fund and a collapse of the system.
The sad truth is that an awful lot of Americans are going to be quite a bit poorer in their old age than they expected to be.
Filing Chapter 11 is easy. Emerging from Chapter 11 is quite another, particularly when there is no viable plan for doing so.
Dying is easy, comedy is hard.
Someone should tell these guys to calm down about the union-busting aspect…
http://emptywheel.firedoglake.com/2008/12/16/killing-gm-in-the-guise-of-saving-it/
George Bush has no intension of
giving GM and Chrysler any loan.
His admin is rolling the dice on a prepacked
bankrupcy. They figure if they wipe out
the stock and bond holders they can
then give the company money to restructure.
That’s providing the suppliers, union
and dealers go along. They are better off
giving the auto’s enough money to February
and let the Obama admin sort it out.
The real problem here is Treasury secretary Paulson. He gives Citigroup 25 Billion cash plus
promises to back stop 250 Billion in bad loans.
No problem. He will not give the American auto
industry a 15 Billion dollar loan. Go figure?
Pure politics at work. At least give GM a
change at restruturing. You can always force them into Chapter 11 in March 09 or so.
Citigroup’s bond holders and shareholders are
intact. The government owns 5% od the company
and no one says boo. White colar New York
vs Blue colar Michigan. It’s the same old story.
Either the current administration forces a Chapter 11, or the next administration will do a full bailout that will never end and never be repaid.
There are other options. Pch101 suggests the government selling off pieces of GM; the only thing I’d change is to start with Chrysler, since it’s the most dead. The point is not to save Cerberus at all; rather, to make sure that Chrysler’s suppliers and customers can survive.
After demonstrating with Chrysler that warranties will be valid, we can examine GM a few months later. It’s very likely that we will need to wind GM down in a similar manner, but there’s a faint chance that they’ll recover. I won’t bet any money on it, though.