Time For Detroit To Meet Chapter 11
One of the hardest parts of my practice is sitting down with new clients who aren’t quite ready to face the truth. They have, in many cases, worked hard and tried their best but sometimes things just are not going to work out the way they want.
Understandably these clients do not want to have to give up and file bankruptcy. Often they will also have to give up a home and in any case they will have to face the mental burden as well as the credit related burdens of the filing. But in the end it gets them past difficult times and allows them to move on to the future.
I think that it is time for the automakers in Detroit to face up to this same reality and file Chapter 11.
I know that this will be a difficult decision which will cause problems for many people. Union members are understandably reluctant to support this move because it would likely result in a restructuring plan that would reduce pay and benefits. Retired workers would face a similar problem with regard to their retirement and pensions.
On the flip side, investors would face a major loss in their investments, suppliers would be concerned about getting paid for their products and buyers and dealers would wonder about how long warranties would be enforced and how long parts would be available.
Indeed it is quite possible that the restructuring would see some of the troubled companies shut down entirely, or several of them merged into one new corproration. Pain will be spread out around a large group of people.
But the reality is that we are no longer at a point where we really have a choice. We can continue to pour billions of tax dollars into the current companies but the fundamental problems will not go away. Just as people need to restructure to make their budgets work so these companies need to work out their own problems.
I am obviously not a financial expert and I do not pretend to be the one with all the answers. But the auto companies today are like a man with major heart disease trying to resolve his problem by cutting out fast food. In order to survive he has to face the reality of needing surgery. The process is not easy, it is not painless, but in the end it is required.
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8 Responses to “Time For Detroit To Meet Chapter 11”
Chapter 11 was the right solution from the gitgo. No taxpayer money should have been given to the companies directly. Government guarantees of their warranties might be OK, but direct government funds should have been limited to helping the workers who were displaced.
Businesses should remain free to succeed or to fail. None should be considered too big to fail. Doing otherwise will be a disaster, if not in the short run, certainly in the long run.
I think the big problem is that if the automakers go under, they will take a lot of smaller companies with them.
I believe they've spent their bailout money paying their vendors and suppliers.
I don't think zombie companies should (or can) be propped up indefinitely. But this is a fairly thorny problem.
Don't forget though that companies can emerge from Chapter 11 and continue operating normally.
But, their suppliers may not be able to survive a GM bankruptcy, even if GM can survive. The money provided has been used to pay these suppliers and even with those payments, suppliers are barely keeping their heads above water because car sales are so far down. Withhold payments and they will almost certainly fail.
I think Obama should put GM into bankruptcy receivership and appoint the DemCong as the new turnaround management group.
Undoubtedly, the autos that roll off the line will have front axles that drive north, while the rear axles will drive south, but it will otherwise hopefully distract them enough to keep them from screwing up even more crucial things over the next 19 months.
You do realize that U.S. employers have only slashed 742,000 jobs in March, a measly 650,000 Jobs in February and about the same in January. If we can keep things going at this rhythm until the end of the year, it 'll only be 8 million jobs.
Barely worth mentioning…
Pat,
Once again…I agree with you! The key is for the government to provide debtor-in-possession financing to allow GM to continue to operate during bankruptcy. Liquidation would be a catastrophe. Chapter 11 would be the right medicine.
I did not think I cared at all wht happened to GM. But March 31 was an historic day . This day the President of the United States fired CEO Rick Wagoner.
I had heard of captains of industry, but I never knew they were actual captains until Commander in Chief Obama excersized his newfound authority. On March 31 he expanded from being the commander of the armed forces to being the commander of the workforce. March 31, the largest conscription day in history. We are all enlisted. The military fights for our freedom. But what do the new recruits fight for–a welfare state and bloated government?
March 31, an historic day. I actually do care what happens to GM. And I really care what is happening to me, and industry in general.