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A New Chapter for General Motors

Specifically, Chapter 11. General Motors’ creditors have rejected the latest offer extended to them to facilitate an out-of-court restructuring — a swap of some $27 billion in GM debt for a 10 percent equity stake in the new, reorganized company. Creditors are complaining that union stakeholders were offered a much better deal than they were (true) and that an equity stake is unlikely to be worth much (also probably true). Evidence for the latter comes from the deal struck between United Auto Workers and the company; the union pushed hard for inclusion of preferred shares, which pay an annual dividend of 9 percent. The between-the-lines message is that they want some cash in hand, because they don’t anticipate being able to sell common shares for much down the road.

What does this all mean? Well, it means that GM is headed for bankruptcy. The government will try to push for a speedy reorganization and sale, but the company is a big, complicated beast, and so a standard Chapter 11 process, taking several years, could instead be the result. It’s difficult to sell cars while in bankruptcy (one presumes), so a protracted process could ultimately lead to liquidation — that is, selling off GM assets down to the last lugnut-affixing robot.

The main problem is that the government is providing the bulk of the bankruptcy financing (some $50 billion), which could give it as much as a 70 percent stake in the new automaker. This is tricky business. For one thing, it means that if the reorganized company doesn’t do well, the taxpayers take a big hit. It also means that the government has a big interest in keeping the reorganized firm afloat, which increases the likelihood of political meddling in the industry and continued cash infusions or subsidies. But the real rub is that GM’s obligations are large while its potentially successful sub-units are small. And those potentially successful sub-units will not be successful if they are saddled with too many of GM’s large obligations. So, for this to really work, the government has to swallow a lot of GM’s baggage and let free a new, trimmed down, unburdened GM. If that new company does well, the equity stake will have value and taxpayers will get back some or most of their investment. If it doesn’t — and in this economy, it will be swimming up a waterfall — then the government will have shelled out tens of billions of dollars just to prop up GM for a matter of months and delay the inevitable reallocation of workers and capital away from an utterly failed enterprise.

High risk, tiny chance of breaking even. What’s not to like?

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