Bush Presses for Impossible Out of Court Restructuring for GM, Chrysler
President George Bush announced that General Motors and Chrysler will receive $13.4 billion in loan money from the Wall Street bailout fund, in a move to keep the companies afloat through March. He also wants to see Congress allocate another $4 billion for bridge loans.
By the Spring, the auto makers will need to provide the White House with a restructuring plan that demonstrates viability.
Bush’s announcement is similar to the proposal that died in the Senate a few weeks ago, when the lame-duck, largely unpopular president didn’t have the political clout to twist the arms of Southern Republicans with foreign car manufacturers plants in their states to sign on.
To take a step back from the politics at work, it’s important to note that Bush is essentially asking the car companies for a rapid, bankruptcy-style restructuring outside of the court system. In bankruptcy court, the end goal is to come up with a viable restructuring plan that creditors agree to support. The clear upside to an out-of-court bankruptcy is that the companies get to continue to operate without the stigma of Chapter 11, which auto executives and some experts say would drive down already-dismal sales. But, at the same time, there are many challenges, perhaps insurmountable, to an out-of-court restructuring.
Here’s the kicker. Normally, a company can’t just go to it’s creditors and say, look we’re broke, we are only going to pay you 40% of what we owe you. Under Chapter 11 protection, that’s exactly what happens. It works because creditors are pooled into groups. The company needs to build consensus, not win over every creditor. The exact rules vary by type of debt and amount.
In the next few months, GM and Chrysler are going to need to put together plans by working with individual creditors, rather than pools or classes of lenders and other interests (unions, suppliers, etc.) That doesn’t make for an expedient process.
Which brings me to my next point. Even though it is easier to reach agreements in bankruptcy court, the negotiations take time. Several experts I spoke with last week said a GM bankruptcy process would take years. Guaranteed. So, the White House expectation that GM and Chrysler can put together this plan in a matter of three months is pretty much impossible.
Bush said today that if these companies can’t come up with a plan by March 31, they’ll have to pay back the loans. Presumably, the companies will be forced into Chapter 11, unless the next administration or Congress takes serious action.