I Was Wrong About GM Bankruptcy

It now appears that General Motors (GMGMQ.PK) will shortly leave Chapter 11. Like the Chrysler bankruptcy, I was wrong to think that it would be an extremely long and drawn-out affair. While having two of the big three go into bankruptcy was bad news for the economy, their short stay in bankruptcy means that the damage is going to be much less than I feared.

That said, the previous shareholders have been wiped out, and many of the creditors — including some pretty senior ones — got not just a haircut but a shaved head.

The government (61% U.S. and 11.7% Canada) and the UAW (17.5% in the Health Care Trust) will control the new GM. I hope that the government does not plan on being the controlling shareholder forever, but on the other hand I don’t want to see it totally lose the almost $50 billion that it has dumped into GM (and Chrysler) — first in an attempt to keep them out of Chapter 11, and then in an effort to make the prepackaged bankruptcy go as smoothly as possible.

Clearly, they failed on the first measure, but on the second they succeeded beyond my wildest imagination. Lat night’s ruling by Judge Robert Gerber, allowing the sale of the “good assets” to the “new GM” will allow this to go forward far faster than I had imagined. The only real alternative was the liquidation of the company, which would have yielded very little to the creditors and caused far more economic disruption.

The new GM, unburdened by most of the liabilities of the old GM, will be in a much stronger position to compete. Ford (F) in particular should be concerned about this, as it had most of the same problems as the old GM had (just not quite as severe), and it was able to avoid the government handout/bankruptcy route.

However, the overall auto market faces severe headwinds with unemployment and the savings rate rising.  So it is not like the good times are coming back anytime soon. Eventually, though, the big auto parts suppliers like TRW Automotive (TRW) and Tenneco (TEN) will have their biggest customer back. It will not be as big as it used to be, but at least it will still exist.

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