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Two Questions about the Motor City Shakedown



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A number of people have asked some version of an illuminating question: If the total value of the shares of GM, Ford and Chrysler is less than $7 billion dollars, why would we have a $25 – 50 billion bailout; why wouldn’t we just buy the companies and save ourselves a ton of dough?

Because (at least in the case of GM) we would need to pony up billions more in cash as the new owners within less than three months to continue to fund operations, or else just go into bankruptcy then. Ford would have a few more months before facing the same problem. The fact that the market value of equity is so low is a reflection of the fact that these companies can’t generate the cash through internal operations that they need to continue operating, and have put themselves in such a terrible strategic position that lenders don’t see this as a short-term problem. The Big 3 can’t borrow much more money because potential lenders don’t see how they will ever get their money back. Of course, this raises the further point that at current course and speed even the bailout itself would probably only keep them going for another year. Come next Christmas, we would expect to be right back where we are now.

A second question is: If the situation is so dire that the Big 3 would have to go into Chapter 7 bankruptcy (basically, cease operation immediately) instead of Chapter 11 bankruptcy (basically, continue operations while a bankruptcy court resolves creditor disputes), won’t the disruption be a lot more severe than all this happy talk of bankruptcy just being a change of ownership, and therefore won’t there be an economic cataclysm?

Well, the premise that all of the Big 3 would have to go into Chapter 7 is far from obviously true, but let’s assume it for a moment. Further, if this happened, people will still buy cars, and it’s not obvious that the assets, people, brand names, IP, and so forth currently owned and employed by whatever companies did go into Chapter 7 would not be fairly rapidly purchased and put into use by new owners, but let’s grant the premise that somehow these assets are so innately valueless that they would be left to sit idle (but we still want other taxpayers to fund the employment that they create, which by this assumption would apparently be required forever since they have insufficient value to attract private financing). Even if I granted all these premises, I still wouldn’t want a bailout in the form of loans to the current owners of the Big 3. It would be far preferable for federal funding to be used as DIP financing for a pre-packaged Chapter 11 bankruptcy. That is, I would use the money to finance an orderly transition of ownership under a Chapter 11 bankruptcy rather than a Chapter 7 bankruptcy. Shockingly, you won’t find the lobbying and PR arms of automakers and the UAW making this argument.



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