William J. Holstein

Deep Truths About Pushing GM Into Bankruptcy
April 16, 2009--As I've long argued, bankruptcy lawyers and their investment banker allies are trying to push GM into bankruptcy because of the huge fees they can earn. For evidence of how much money is at stake, the Wall Street Journal reports today that Weil, Gotshal & Manges LLP has asked a federal bankruptcy judge in New York to sign off on a $55.1 million payment for its work for representing Lehman Brothers Holdings. Absorb that fact: the law firm makes $55.1 million in a single quarter for representing a bankrupt firm. It's a record.

So how much could a bankruptcy firm make representing GM? Obviously much more. If Weil, Gotshal is on track to make $200 million in a year, then GM's bankruptcy legal fees could easily double that. And $400 million is real money. Think of all the fat bonuses.

Now we can understand why bankruptcy lawyers are saying they can help GM do a "surgical" or "controlled" or "pre-packaged" bankruptcy. The truth of the matter, as I've been arguing, is that once GM goes into any form of legal bankruptcy, it may never emerge again. But the lawyers would not care--as long as they make their fees.

For evidence of what might happen, turn to an article in today's New York Times by Michael J. de la Merced about Delphi, the largest parts maker for GM. An independent company, it declared bankruptcy under hotshot turnaround artist Steve Miller in 2005. But it still hasn't been able to emerge. After three years of clashes with unions and bondholders, Delphi is "teetering on the brink of collapse," Merced writes. He continues: "Its prolonged and tortuous route through the courts provides a stark counterpoint to the widespread hope that if General Motors itself is forced to file, its bankruptcy will be quick."

Stark counterpoint? No, it's a flat out contradiction of what all the bankruptcy lawyers have been saying about GM. What the Delphi situation shows is that the bankruptcy courts cannot necessarily deal with a bankruptcy the size of GM's. Delphi now faces possible liquidation. The same thing could happen to GM if the investment bankers and bankruptcy lawyers continue to shape the Obama administration's policies. Obama is headed into dangerous territory indeed.