WSJ Report: GM Considering Chapter 11 Filing

I figured this story was important enough to suspend my usual moratorium on Saturday blogging…

…although nothing is official yet and the bulk of this information comes from “unnamed sources”, it does at least appear that General Motors (GM) is seriously considering a bankruptcy filing as a path to profitability, as opposed to the current strategy of creating a “viability plan”.

From the WSJ:

General Motors Corp., nearing a federally imposed deadline to present a restructuring plan, will offer the government two costly alternatives: commit billions more in bailout money to fund the company’s operations, or provide financial backing as part of a bankruptcy filing, said people familiar with GM’s thinking.

The competing choices, which highlight GM’s rapidly deteriorating operations, present a dilemma for Congress and the Obama administration. If they refuse to provide additional aid to GM on top of the $13.4 billion already committed they risk seeing an industrial icon fall into bankruptcy.

Some experts and members of Congress say bankruptcy reorganization is the surest way for GM to cut costs and become viable. But it could be a politically unpalatable development during a recession that already has thrown millions of workers out of jobs.

Treasury Department officials believe GM needs at least $5 billion more in U.S. loans to keep operating beyond the first quarter, said people familiar with the situation.

The call for additional funds will be a key part of the revitalization plan GM is required to file with the Treasury by Tuesday, though it is unclear whether GM will furnish a dollar amount, said people familiar with the matter. The plan is supposed to describe how the company will become self-sustaining and better compete with foreign rivals.

But it’s increasingly unlikely GM will have a finished plan in time. Negotiations with GM’s unions and bondholders haven’t yet produced commitments to concrete concessions as required by terms of the federal loans; talks are expected to continue over the holiday weekend. People involved in the talks say progress has been slowed by the fact the Obama administration has yet to appoint a “car czar,” as envisioned by the bailout program…

…GM’s board began more seriously considering bankruptcy in November as the company’s liquidity headed toward unsustainable levels. In early December, at the board’s prompting, Mr. Wagoner hired bankruptcy lawyers and advisers to begin preparing a contingency plan, said people familiar with the matter.

In the months that followed, these bankruptcy experts worked alongside advisers Evercore Partners and Morgan Stanley , both of which previously worked for GM, to develop multiple options for GM’s future.

One plan includes a Chapter 11 filing that would assemble all of GM’s viable assets, including some U.S. brands and international operations, into a new company. The undesirable assets would be liquidated or sold under protection of a bankruptcy court. Contracts with bondholders, unions, dealers and suppliers would also be reworked.”

Graphic courtesy of the WSJ

Personally I believe that this is the best news to come out of GM since the announcement that they’re bringing back the Camaro. There is actually a good car company under the morass that is GM, and a Chapter 11 filing could allow that company to breathe without being crushed by the weight of liabilities and debts the company can’t possibly service. Even if GM was able to create a viability plan that keeps the company (as presently structured) more or less intact, they’re still going to be at a competitive disadvantage to companies who are significantly more operationally efficient.

Bankruptcy is the best option because it gets to the heart of the problem: GM’s operational inefficiencies. As I’ve noted dozens of times companies like Honda are able to generate multiple of GM’s profits with a fraction of the market share, GM’s woes aren’t a function of a lack of market share they’re a function of a lack of efficiency.

My only concern is that there may not be enough political will within GM and (more importantly) in Washington to make this happen. In an era when the government is considering paying a portion of people’s mortgage payments in order to prevent foreclosures, it’s not hard to imagine a reality where the government would refuse to support a bankruptcy. The job losses within GM, at car dealerships, the loss of payments to local municipalities, etc, might be too much for the government to stomach.

I suppose the question of the day is: are the Government and GM ready to partner-up and remake the company into one that’s right sized for the age, or are they going to continue to try and prop up the old model due to the large number of people, organizations, municipalities, et al it supports and/or subsidizes?

If they choose the former GM survives and becomes a profitable car company that is better positioned to innovate and compete against it’s foreign competitors, if they chose the latter than GM will inevitably fail and cost the taxpayer 10s of billions along the way.

Source:

The Wall St. Journal: “GM to Offer Two Choices: Bankruptcy or More Aid” — John D. Stoll, Sharon Terlep, February 14, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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Comment by Duude

2009-02-15 17:41:49

This isn’t news at all. This is their bargaining stance. They use it against 4 opposing parties. The UAW, contracted vendors, bondholders, and the Democrat party. It is their only bargaining chip and it doesn’t hold much weight because the first 3 know the Democrats in Congress will bend over backwards to keep the UAW sitting pretty. End result: taxpayers will likely be extorted for as much as 100 billion from GM alone over the course of the next 4 years, and GM will continue to lose market share every year.

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