More Taxpayer Bailouts...

[GrayMatterWife]

Re: More Taxpayer Bailouts...

Isn't GM supposed to file for bankruptcy before the end of the year?

It's always a possibility, but I would be surprised. I just glad they won't be filing HERE. I don't want to be the law clerk on that monster case!! I'd never see daylight, I'd be so buried in work.

If they file for BK, that would be a GOOD thing. They could get protections from creditors, possibility offload their pension obligations to the PBGC. Bankruptcy is, in a way, a taxpayer bailout of a corporation, but it is a much more organized way to do it that FAR better protections the creditors' interests and the taxpayer dollars.

I don't mean to sound like I want to see Michigan suffer any more than it already is. That's not it at all. I grew up in Pittsburgh during the early-mid 80s. I know all about how the collapse of an entire industry can devastate a community. But Pittsburgh rebuilt, and so can Detroit--around either a much-improved (and probably smaller) auto industry, or eventually around another field.

[Sheherezade]

Re: More Taxpayer Bailouts...

From what I've heard the concern with bankruptcy is that they predict it will cut sales by around 80% - the logic being that people won't buy a high cost product with warranty coverage from a company in bankruptcy and that suppliers will be reluctant to do business with them as well. :huh: I guess if they take a further hit on sales, there is no hope at all.

Bleak.

I heard today that the current value of GM is 1 billion dollars. You can buy the company for 1 billion. Their debts are around 35-45 billion dollars. Apparently, Footlocker is now worth more than GM.

It is a shame that so many suppliers (tires, bolts, steel and apparently even advertising companies) are dependent on the auto industry if it is soooooo weak. I don't see how that comes to pass. I am making an assumption now bu I'm guessing that they used a lot of short term credit to prop themselves up for years now and that without that option these days they are "revealed" and unable to continue.

I'm morbidly curious about what would happen if they just went under. I like Kris Math's idea of propping up the businesses that rely on the auto industry instead of the auto industry itself. I wonder if there is any national defense reason to maintain a U.S. controlled auto industry. All of the big three are in trouble....GM is just first to the chopping block.

[GrayMatterWife]

Re: More Taxpayer Bailouts...

From what I've heard the concern with bankruptcy is that they predict it will cut sales by around 80% - the logic being that people won't buy a high cost product with warranty coverage from a company in bankruptcy and that suppliers will be reluctant to do business with them as well. :huh: I guess if they take a further hit on sales, there is no hope at all.

There's a lot of talking out there. Companies do not necessarily lose any business when in BK. Some companies do, but because they reduce their business size as part of their turnaround efforts. The warranty issue should not be a deterrant in a chapter 11 context (where you file for BK but keep operations going while your reorganize). For practical purposes, they will have to honor their warranties (that is, they would not "reject these executory contracts" if they wanted to ever get to a truly effective plan of reorganization). I have not heard that GM is considering going chapter 7 (that is, liquidation and immediate shut-down of all operations).

On the the issue of trade vendors and suppliers--they would be WAY more apt to do business with a company IN bankruptcy than one simply on the verge (that is, as they say in the business, "in the zone of insolvency"). The reason is this: once the company is in bankruptcy, its trade vendors and suppliers get certain protections under federal law, which make it FAR more likely that they will get paid, regularly and in full. The Bankruptcy Code operates to encourage vendors and suppliers to do business with chapter 11 bankruptcy entities, not to discourage them. Vendors' "postpetition" (after entry into bankruptcy) claims get highly preferential treatment--treatment that their "prepetition" claims won't get.

I am not saying BK will make everything rosy. It won't. Even in chapter 11, a lot of people are going to suffer. But chapter 11 avails the company to an opporuntity to get some "breathing room"--buys time to stall creditors and evaluate things. But you are sure right--if they can't come up with a truly improved business plan (which may involve massive restructuring and product cutbacks), then the situation will not get better in the long term, BK or not.

I'm morbidly curious about what would happen if they just went under. I like Kris Math's idea of propping up the businesses that rely on the auto industry instead of the auto industry itself. I wonder if there is any national defense reason to maintain a U.S. controlled auto industry. All of the big three are in trouble....GM is just first to the chopping block.

A national defense reason to nationalize the auto industry? Gads, I hope not. That would really be creating a long-term, intractable taxpayer subsidization of a contrived market for a product for which there is not proportional demand. But that's just me.

I thought this way a pretty interesting article, written for the broad public audience (you don't have to practice this type of law to understand it). The author thinks that GM might not be able to successfully reorganize (if that's the case, GM would probably file as a chapter 11, to help preserve the ongoing goodwill value and honor obligations and get the pension stuff worked out, then later on convert to a chapter 7). I am not sure I agree with this direness, but I don't know enough about the innerworkings of the auto industry.

http://money.cnn.com/2008/11/13/news/co ... 2008111305

Oh, hey, I saw where you're coming from with the idea that they might filed for BK by EOY. This article says that GM will be out of cash by EOY. Could be. Or could just be them trying to position themselves as urgently needing a cash infusion. Who knows. However, even if they run out of cash by EOY, they could avoid BK, at least for a little while, with a bridging loan. If they can't get a bridging loan, that would be pretty bad--that doesn't bode well for being able to obtain a lender to provide them with in-bankruptcy financing and exit financing. If they can't get that kind of lender (called a "DIP," which gets MAJOR protections under the BK code), then that would be incredibly bad. They would have to go chapter 7.

[DCJenn]

Re: More Taxpayer Bailouts...

Robert Reich (sp?) on NPR yesterday said exactly that- the Big Three should file for bankruptcy protection and let the bailout be used for banks.

What's more interesting about that is that he's one of the Obama transition economic advisors.

It's such a vicious downward spiral- I honestly don't think Paulson or anyone else for that matter has a clue as to what to do.

Maybe we should just NOT do something for a few weeks and see what happens. Obviously the first 450 billion haven't done jack shit.

I'd really much prefer that we use the money to do more of a WPA type deal- rebuild the stuff that needs to be rebuilt (including upgrading schools and other institutions for 21st century technologies which would put the out of work techies back to work) which would get people working again, which would then increase the taxes paid to the local, state and federal governments which would then continue the infrastructure repairs.

J.

[GrayMatterWife]

Re: More Taxpayer Bailouts...

Robert Reich (sp?) on NPR yesterday said exactly that- the Big Three should file for bankruptcy protection and let the bailout be used for banks.

Oh, dude, seriously? I agree with Reich on something? Crap. This is a first. Holy cow. I am now questioning myself. Or, maybe I'm flattering myself...I don't agree with his politics, but he's a really smart guy...

[DCJenn]

Re: More Taxpayer Bailouts...

Yeah, no kidding! It was a great interview- see if you can find it.

I think it was on Morning Edition.

jenn

[GrayMatterWife]

Re: More Taxpayer Bailouts...

BTW, if I am driving everyone crazy with "Intro to BK Law 101," just tell me, "Enough."

I am not fashionable, I don't have tons of great recipes, I am not trying to conceive, I don't know much about TomKat (other than the generally accepted creepiness of it)...so I am limited in the ways I can constructively contribute to a lot of the threads. I am excited that other people are interested in the bailout stuff and the situation with the auto industry, too!

[Sheherezade]

Re: More Taxpayer Bailouts...

Actually, most of the people I've heard have been saying let them go in to bankruptcy. So.....I'm afraid you agree with a lot of people!

What I heard about the bridging loan or DIP (and didn't readily understand!) was that they aren't available because of the credit crisis. At least, would not be available to GM. That is part of the debate I guess. They could usually do things that they can't right now because bank lending is still far worse than normal.

From CNBC Oct.22nd:

Congress, recognizing the general wisdom that a company is more valuable operating than liquidating, established the Bankruptcy Code, which provides companies in distress with tools to fix their operations, right-size their balance sheets and divest themselves of assets, while being protected from actions of individual creditors. The Bankruptcy Code does not guarantee survival of companies in distress, but it provides the opportunity for companies to maximize value for the benefit of stakeholders and emerge from chapter 11 with a fresh start.

To operate in Chapter 11, a company needs liquidity. While the Bankruptcy Code provides protections and tools, it does not provide liquidity. The DIP loan -- i.e., the loan made to a distressed company to enter and operate in chapter 11 --provides liquidity and used to be a no-brainer for a company to obtain and a lender to make. DIP loans have special status under the Bankruptcy Code, providing protections to DIP lenders. However, today, the DIP loan market is severely constrained. For our corporate reorganization regime to work properly, distressed companies need access to the DIP loan market or good, but over-leveraged, companies will fail.

I like the bankruptcy explanations! Keep them coming.

My national defense pondering is mine alone. We should declare the debate forum "Amateur Pundit Corner"

[GrayMatterWife]

Re: More Taxpayer Bailouts...

From CNBC Oct.22nd: . . . However, today, the DIP loan market is severely constrained.

Boy, that seems almost a polite understatement! How about "the DIP loan market is practically paralyzed"? Yeah, the traditional DIP loan market might not come through for GM, unless the federal government is willing to be a co-guarantor on the loans. However, there is always the possibility that non-institutional lenders (for example, a kabal of wealthy individual investors, lead by Buffet or someone) might come to the rescue. I would not be surprised if GM was able to get DIP lending, one way or the other. But then, I really don't know anything more than the gossip about their internals, which may make it completely unattractive for anyone to loan to them, even with chapter 11 protections.

My national defense pondering is mine alone. We should declare the debate forum "Amateur Pundit Corner"

Hey, two points for creativity! At least you're thinking outside the box...unlike the bailout junkies.