One on One with Edward Altman, Finance Professor at NYU Stern School of Business
Thursday, May 28, 2009
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SUSIE GHARIB: In a New York courtroom today, Chrysler Chief Executive Robert Nardelli told a bankruptcy judge that a deal with Italian auto maker Fiat is in everyone's best interest. Nardelli said a sale of Chrysler's assets to Fiat would make the company stronger over the long term. The judge could rule on the sale as early as tomorrow.
Joining us now to talk more about Chrysler and GM is Edward Altman, bankruptcy expert and professor of finance at New York University's Stern School of Business. Professor Altman, welcome to the program.
EDWARD ALTMAN, FINANCE PROF., NYU'S STERN SCHOOL OF BUSINESS: Thank you, Susie.
GHARIB: All right, the expectation is that General Motors is going to breeze right through bankruptcy because of all of these agreements in the prepackaged bankruptcy. From your experience, is that going to be the case?
ALTMAN: Well, it's looking more and more like it's going to happen. I never would have thought that they could do it as effectively as they seem to have done it now. They still have to get two-thirds of the bondholders, not one-third, to agree in dollars and one half in number. They probably will get that. There could be some appeals from various constituents like dealers and foreign subsidiaries. It's a very complex company. And but the chances are much better the government has orchestrated this process beautifully in the last few months, much better than I thought was possible. At the same time, it all might not work.
GHARIB: All right so, what could go wrong here?
ALTMAN: Well, first of all and mainly, they're going to be coming out of bankruptcy let's say in two months in a terribly severe recession. No - - very few people are buying cars now. They are not going to buy cars just because they're out of bankruptcy. They're going to be buying cars because they like GM cars. And so far, at least recently, they have not shown that to be the case. I have great concerns whether or not GM is a viable company in the long run even in or out of bankruptcy.
GHARIB: All right, what about Chrysler? What kind of shape is it going to be when it comes out of bankruptcy? A lot of people are saying that it could be out of bankruptcy in the next 30 to 60 days.
ALTMAN: Yes, they probably will be out of bankruptcy that soon. Even more so with Chrysler's case. It's a hard sell to me that we need three large auto makers in the United States in the future when there is only going to be 10 million cars maybe sold in the United States and North America in the future. Chrysler in my opinion has a much greater chance of not surviving than surviving in its present form. Perhaps it will be a Fiat dealership in the future, that's very likely. Whether or not they will be selling many Chrysler cars in a year or two is highly uncertain.
GHARIB: Now there are a lot of players that are going to still be involved in negotiations in bankruptcy court. There are the bondholders. There are unions still. There are people who have pensions with GM. When you look at all of the players, who comes out as the winners and the losers?
ALTMAN: It's pretty clear in this case that the taxpayer is potentially a big loser here with the $50 billion plus that they are putting into GM when the company might not be viable. And those shares will be worth very little if anything later on. The unions I think are probably the biggest winners, although they have been cut down and that was a wise move on the part of the government as well as the unions. The bondholders, although they are getting a bit more sweeter deal than they had before, I still think are being treated unfair. But they realize that this is probably the best that they can do under the circumstances.
GHARIB: Now Professor Altman, I know that you have run these bankruptcy models, kind of a stress test for companies that go into bankruptcy. And you did that for General Motors. What were the scores and the results of that test?
ALTMAN: When I testified in Congress last December we ran it the so- called Z score model on General Motors at the time and they clearly were in the bankrupt zone. And they remained in the bankrupt zone even with the restructuring, bailout deal that was being proposed to Congress. Recently we have run the model again. And although the results look significantly better, they still look like they're either in the bankruptcy zone or very close to it. And if they continue not to sell very many cars and the revenues don't increase like was proposed earlier would be the case, I think that there is a very good chance that they could actually file for bankruptcy again. We call that Chapter 22 in a year or two from now.
GHARIB: Very interesting information. We really appreciate your thoughts in coming on the program.
ALTMAN: My pleasure.
GHARIB: My guest tonight, Professor Edward Altman of NYU's Stern School of Business.
