William J. Holstein

GM in Bankruptcy: Could it be Obama’s Iraq?
April 11, 2009--

I see a parallel between the George Bush decision to invade Iraq and the Obama administration's posturing on bankruptcy being the best outcome for General Motors--Bush went into Iraq without knowing the difference between a Shiite and a Sunni. And Obama's task force, headed by an ambitious investment banker, does not understand the risks of bankruptcy. There is a smug air of self-assurance about it.

I understand why the bankruptcy lawyers and investment bankers want a Chapter 11 bankruptcy. They stand to make hundreds of millions of dollars of fees for their services. It's like a wet dream for bankruptcy lawyers in particular.

So they are arguing in public, both inside the administration and through the media, that bankruptcy is best for GM--it would be able to change the contract with the United Auto Workers, force bondholders to accept pennies on the dollar, and challenge state franchise laws that protect a bloated dealer network.

They say that it can be a "controlled" bankruptcy and that even a "pre-packaged" bankruptcy can work. But the fact of the matter is that once GM goes into Chapter 11, it cannot be controlled. It's in the hands of a bankruptcy court judge.

The company is warning, and I agree, that the fog of war would descend on GM in bankruptcy. What now looks like a clean, surgical operation, just as the U.S. invasion of Iraq, would quickly get mired down in reality. Take a look at Delphi, GM's large part supplier, that went into bankruptcy in 2005. It still hasn't been able to emerge because of the conflict of intractable interests.

In GM's case, the nightmare scenario that I fear is this: a bankruptcy judge would attempt to impose a settlement on the different constituencies, including suppliers. This is the Achilles heel. GM depends on thousands of suppliers organized in at least three tiers. It is an intricate web. If Tier One suppliers are brought to the table and told to reduce their prices by 10 or 15 percent, they might be able to do it, but they would do it by demanding concessions from the thousands of suppliers in the pyramid beneath them. If only five or 10 of those suppliers said, "We can't do it. We're out of business," the parts would stop flowing to GM's assembly lines. And once that happens, the money that GM is currently loosing would turn into an absolute gusher. Liquidation might be the only option at that point, meaning selling off the assets for pennies on the dollar.

That's what Obama is playing with. It's time for him to get some real auto industry expertise on his auto task force and stop relying on investment bankers and bankruptcy lawyers, who are in this for their own narrow gains. They don't really care what happens to GM as long as they get paid their fees.