How Might GM’s Bankruptcy Work?
Question: How might GM’s bankruptcy work?
Paul Solman: For answers, I can’t improve upon this exchange with Wayne State law professor Laura Bartell, whose interview we’ll feature in our GM bankruptcy story, slated to run on Monday’s NewsHour. This Business Desk version of the interivew is, at the very least, a lot more extensive, one of the advantages of web over broadcast. We can plumb the depths, knowing you can stop descending at the first inklings of ennui.
PS: What’s bankruptcy?
PROF. LAURA BARTELL: Bankruptcy is a federal statute that allows troubled debtors to obtain relief from their debt and there are two basic ways that bankruptcy can operate. One is a Chapter 7 liquidation where the company that existed prior to bankruptcy sells all of its assets, the proceeds are distributed to its creditors, and it ceases to exist. That is not what General Motors proposes to do, and we hope that is not what General Motors will do.
[Because if GM were to liquidate — sell off its assets in the greatest fire sale of all time and vanish — the various creditors, from banks to bondholders to the UAW, would get perhaps 10 cents or less for each dollar of GM’s promises.]
LB: The alternative is a reorganization under Chapter 11. In a reorganization the company proposes a plan under which it satisfies its creditors and shareholders, generally for far less than they are owed, and emerges at the other end a reorganized company free of its prior debts….
GM is a strange situation because, like Chrysler, they plan to circumvent the normal requirements for a plan of reorganization by doing a sale of their assets to a new company. They’re selling all of the good assets — Chevrolet, Cadillac. Everything that they want to retain, they’re selling to a new company. A sale of assets under the Bankruptcy Code simply requires approval by the court and approval by the court can be obtained by motion. And yes, various constituencies can object to the sale, and the judge can overrule those objections, as the judge in Chrysler undoubtedly will.
PS (beginning to understand): So, then what happens?
LB: Remaining assets will be sold and liquidated and distributed. But there’s not a lot left….This is why the Chapter 11 debtor is always saying to its creditors: ‘You have to come along, get with the game, or I’m going to jump off the ledge, I’m going to shoot myself in the head, I will convert to a Chapter 7, we’ll liquidate the company, and you will get virtually nothing.’
PS (a lot less articulately than LB, but if I’m transcribing her, I shouldn’t gussy up MY words, should I?): Because the assets are not the value of the business?
LB: The assets are a very small part of the value of the business and they aren’t worth much individually. Their value is when they’re put together in an ongoing operation.
[So GM’s plan, drawn up by what is now its major creditor, the U.S. government, is to create a NEW GM company, variously called “NewCo” or “GoodCo,” which will sell Chevys, Cadillacs, Buicks, and trucks. It will sell off Pontiac, Hummer, and Saturn, among other “assets,” for whatever it can get. It’s been negotiating with its creditors — suppliers, dealers, bondholders, and most of all, the UAW — on the terms of GoodCo’s obligations going forward: who owns how much of it, what it will pay on its promises, etc.]
PS: One hears that that this is incredibly complicated. So, what’s so complicated about General Motors compared to Chrysler, or is that simply not true?
LB: It is true. There are three basic reasons that General Motors is unlike anything else. One is: It’s just a very big company. We’re talking about billions and billions and billions of dollars of debt. So, that sheer size makes it unlike even Chrysler.
Second: It’s a global enterprise in a way that Chrysler is not. It’s got operations all over the world….That creates a lot of difficulties because although the U.S. bankruptcy court can reach assets overseas, the overseas governments don’t always like U.S. bankruptcy courts coming in and telling them what to do with assets in their jurisdictions. So, the global scope of GM is unlike anything else.
PS: In other words, so if I am a secured creditor but my collateral is a plant in Germany, say, I might have trouble collecting on that collateral?
LB: You’re going to have to deal with German law, not just the U.S. Bankruptcy Code.
And third, there just a lot of different constituencies. It’s not just that you’ve got a lot of debt, but it’s held by a lot of different people, including a massive amount by the U.S. government. We’ve never had this sort of situation in a bankruptcy court before. Even the little amount — and I hate to call it the “little amount” — that the U.S. government gave to Chrysler pales in comparison with the billions and billions and billions of dollars that they have given and plan to give to General Motors.
PS: Where is the U.S. government in line in all of this? [In other words, what priority does it have as a claimant in the bankruptcy process?]
LB: Wherever they want to be. They’re going to control 70 percent of the company. They can pretty much dictate terms. Now, President Obama says they don’t want to run a car company, but they’re kind of the polar bear in the corner. You can’t ignore them.
PS: Is he being a socialist here, by taking 70 percent of a company?
LB: Government ownership of a company — I don’t think that that is necessarily socialism. It is unusual, but I would never say that this is a first step on the way to a socialist United States!
PS: Why isn’t it socialist?
LB: Why isn’t it socialist? The government… In socialism the government owns and continues to run the companies. Everything is government owned, government controlled. Our government owns it but doesn’t want to control it, and would be delighted to get rid of it as soon as there is a market to buy it.