WE Blog

Bankruptcy advocates have several reasons for favoring Chapter 11. Some are simply frustrated with the expense and complexity of current government-supported overhauls. (We, too, wish there were quick, easy solutions to the credit crisis and economic meltdown.) Some specifically seek to punish unions, bondholders, corporate leaders, suppliers or other stakeholders. Some believe that bankruptcy will enable GM to “clear the decks” and start afresh. But a tough out-of-court reorganization is best for GM, the taxpayers and other stakeholders. Bankruptcy reorganization takes cash — lots of it. For a company such as General Motors to operate in Chapter 11, it would need massive debtor-in-possession loans. With credit markets frozen, the federal government is the only realistic source of such loans. We estimate loans needed to reorganize GM in Chapter 11 could top $100 billion, far more than the out-of-court fix we envision. One reason this figure is so large is that GM’s revenues would plunge in bankruptcy. The bankruptcy process would bring financial hardship to millions who rely on GM, and upon whom GM relies. — Tom Wilkinson, director, GM News Relations

GM argues that it couldn’t survive a Chapter 11 proceeding, but bankruptcy actually could boost its ability to survive. Two big issues — reorganizing GM’s $30 billion of bond debt, and the potential collapse of the automotive supply chain — are both easier to deal with in Chapter 11. GM has been saying that in Chapter 11 its network of suppliers would collapse, dragging down the whole auto industry. But Chapter 11 has well-established procedures to deal with this concern. GM may run out of cash to pay its suppliers — whether it files for bankruptcy or not. But GM’s supply network is probably more robust with GM bankrupt, as Chapter 11 assures that suppliers get paid out of whatever cash GM has. In addition, bankruptcy may be the only way for GM to fully confront its operational problems, deal with its legacy costs, reconfigure its dealer network and achieve a viable labor agreement. But one issue that has not been discussed much is that bankruptcy usually leads to a sharp change in management. There are turnaround teams expert at reorganizing troubled companies, and they may well be more effective than GM’s current management. — Mark J. Roe, Wall Street Journal