Felix Salmon

The GM Bankruptcy Debate

By Reuters Staff
March 4, 2009

I like the fact that GM responds, on its blog, to things like Mark Roe’s WSJ op-ed saying that bankruptcy is a better option for the automaker than a bailout. Still, I do get the impression of the two sides essentially talking past each other, without much real engagement.

GM basically just points to its restruturing plan, which devotes an entire appendix to the costs of bankruptcy. But at heart the biggest cost is inferred from opinion polls, such as the one which says that "in Germany, more than two-thirds of consumers considering buying Opel before would no longer do so if GM declares Chapter 11 insolvency in the U.S.".

Is this really true? In order to judge this kind of thing, I’d definitely want to see the exact wording of the question asked, since I very much doubt that most Germans really understand the difference between, say, Chapter 11 and Chapter 7.

The GM plan also says things like this with a perfectly straight face:

A GM bankruptcy would threaten GMAC’s ability to fund itself in the capital markets, impairing GMAC’s capacity to provide wholesale and retail financing essential to support the viability of GM.

I didn’t realise that GMAC was able to fund itself in the capital markets. And judging from the most recent figures, it’s doing precious little retail financing even without GM declaring bankruptcy.

At heart, however, there seems to be a complete disconnect when it comes to the meaning of bankruptcy. To bankruptcy professionals and to people like myself, Chapter 11 is basically just a change of ownership. To the population at large, however, it means liquidation and going out of business. Tom Wilkinson, on the GM blog, even seems to think that professionals such as Mark Roe are members of the population at large:

I ask: “Would professor Roe and his Harvard colleagues buy a car or truck from a company in bankruptcy, when there are similar products available at another dealership right down the block?” I expect that if they were honest, they would answer “Probably not.” So why do they expect other shoppers to behave differently?

Well, if professor Roe went and read the GM restructuring plan, as Wilkinson urges him to do, he would find this, under "key simplifying assumptions":

(3) that the Company under a bankruptcy scenario would request substantial and longer term U.S. Government backstop of warranty coverage, and other customer protections, to address consumer concerns, particularly during the bankruptcy court administration period (which would be helpful, but would not address resale value, competitive threats and other lingering customer concerns).

I’m not sure why "competitive threats" constitute a "customer concern". But more to the point, what are the rational reasons for Harvard types not to buy a car from a company in bankruptcy? There’s the worry that the company will disappear, and take its warranty coverage with it — but that coverage has, ex hypothesi, been backstopped by the government. And indeed that worry doesn’t exactly go away if the company is simply losing billions of dollars a month, as opposed to actively trying to put itself on a sustainable footing by going through bankruptcy proceedings.

Other than that, there might be a worry about resale values, but again I’m not clear why such values would be lower just because the company in question was going through bankruptcy: it would probably be useful if Wilkinson could spell such things out.

I do appreciate, however, that there might be non-rational reasons not to buy from a company in bankruptcy — Chapter 11 might be a kind of stigma people don’t want to touch. Not that they’re worried about flying on a bankrupt airline, say, or buying products from a store which is "Going Out Of Business".

My gut feeling, at the end of all this, is that GM has already suffered most of the adverse consequences of declaring bankruptcy: the declaration is "priced in", as it were. But I might well be wrong on that front. The problem is that there’s really no way of finding out, short of actually doing it.

Reprinted from Portfolio.com

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