GM, Chrysler, Citi, BofA, AIG--each faced three and only three clear choices; bankruptcy Chapter 7 (liquidation of assets--meaning shutting the company), bankruptcy Chapter 11 (reorganization--a laborious legal process in which all constituencies lose something on the prospect that the company can survive), or Government rescue. Most in the public and apparently many in government don't understand the difference between 7 and 11, believing that a company going into bankruptcy is kaput! As a result there was very little governmental will to have allowed an 11 bankruptcy. Instead, the third option, Government rescue, was applied without any regard--it seems--for the meaningful and useful provisions inherent in an 11 bankruptcy. Today i'll describe why BK Lite would have been a breakthrough for the government/auto industry, and next week the same for the government/financial industry.
GM cannot hope to survive without structural changes of significance in all these categories: senior debt, all other debt, number of dealers, number of brands, management size, labor work rules, labor hourly costs, labor retirement issues. Most of these issues are more-or-less locked in by contract. When the government told GM to go create a restructuring plan, GM should have said "it's impossible to negotiate with all these constituencies with essentially no authority, and get where we need to go." They should have said it because it's absolutely, 100% factual. But they didn't because they wanted to avoid the full blown bankruptcy filing; by stating this obvious point they might have painted themselves into a corner. So they instead, at the government's request, went to see what little crumbs they could unilaterally negotiate; and the result will be (a) not much, and (b) clearly insufficient. They, even if they were the best managers in the world, could not accomplish this impossible task. No one constituency is going to give an inch in this voluntary la la land. So the government should have enacted legislation creating BK Lite.
BK Lite is simply this; Congress enacts a provision that, if a company accepts funds in lieu of an otherwise assured bankruptcy filing, all contractual commitments are now null. The company then has the right and the obligation to come back with a plan that amends all these obligations, by their judgment--what it takes to be competitive, and hopefully fairly, and then a board of experts selected by the government agrees or amends the plan.
Too simple? probably. Likely to get meaningful results? likely. Better than the alternatives? by a country mile.
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