How Washington blew GM’s bankruptcy

By Michael Levine

Posted on Tuesday, June 02, 2009 11:57:28 AM by St. Louis Conservative

During bankruptcy, GM would have been able to sell off divisions, facilities and brands. Finally, if a plan of reorganisation that was likely to get a better outcome than liquidation was proposed, the court would approve it and a “new” GM would emerge.

What would have been the impediments to doing this? Management would not face the inevitable, so GM had (perhaps deliberately) placed itself in a position where it needed money to keep going long enough to file for bankruptcy. No private credit might have been available for a DIP loan under the conditions prevailing then and now. If the filing was done without prior negotiation with unions and creditors, the proceeding might have been so messy and protracted that it could have substantially reduced the possibility of a successful reorganisation. The plan might not succeed. Notice that I have not mentioned that the filing and the actions taken to protect GM from its creditors would cause great pain to workers, suppliers, dealers and cities. That is because that pain will occur anyway.

What would have been the role for government in this scenario? Providing bridge financing and a DIP loan, and setting a much shorter deadline for filing than was ultimately adopted. The deadline would have forced all parties to negotiate as much “prepackaging” as possible, because the unions and unsecured creditors would not have wanted to take their chances on a filing, and the secured creditors could not have been assured of a rapid liquidation in such an important bankruptcy. The loan could have been secured by GM’s assets and a claim on its revenues, and not involved the government in owning and managing the company.The billions of dollars the government would have saved by starting this process last winter could have been used to alleviate collateral damage through aid to state governments, unemployment insurance, etc. Both of those activities would have met genuine needs, commercial and social, without the government being forced to own and manage GM.
Instead, the Obama administration overtly played favourites…

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