Apparently there might be real reason for optimism on the auto front. Look at these “leaked” stories:
President Obama is convinced that a negotiated bankruptcy is the best way for General Motors to restructure and become a competitive automaker, members of Congress and unnamed sources told Bloomberg late Tuesday.
A possible bankruptcy plan being discussed for General Motors (GM.N) includes quickly forming a new company of the automaker’s most profitable parts, while a group of other units would remain under bankruptcy protection for a longer period, a source familiar with the plans told Reuters on Tuesday.
The “good GM, bad GM” strategy will be incredibly difficult to execute. GM has $188bn of liabilities against around $110bn of assets. $72bn of the liabilities are working capital. That leaves $116bn of liabilities crowding into $38bn of assets. Creditors who remain with “bad GM” will end up with virtually nothing – its liquidation value is negligible.
The UAW has previously made noises about striking if its pension is dumped. At this point, strike = Chapter 7, so it is difficult to see an organized walkout. Not only would the political fallout be unbearable, it would destroy all of the remaining union jobs at the parts suppliers. But it is possible that any number of wildcat actions could take place, up to and including simple refusal to ratify a new contract. Plenty of members would expect the government to honor retiree benefits in full, and would assume the government would flinch if pushed. Perhaps they are right. But the company has to get rid of the obligation, and the government would set terrible precedent if it picked it up at face – where was that largesse when the steelworkers or the airline employees went to the PBGC?
Meanwhile, the dealers – remember, they were left out of the conversation until Obama’s Monday press conference – would start suing anyone and everyone in state court. Franchises in general and auto dealerships in particular are the favored children of the law, and there are endless rules requiring compensation for termination of a franchise or discontinuation of product. Obviously, addressing this important issue is a key reason to go into bankruptcy in the first place, but we should not expect the spurned dealers to quietly accept the reemergence of “good GM.” Note that auto dealers are found in pretty much every congressional district, and more often than not are people of deep roots in the community. The owner is a familiar face at the country club. These guys will call their congressmen. Stay tuned.
Still, as a profile in courage, this is the best we have seen or heard from Obama. I criticized him for knowing the right solution to the banking crisis and refusing to do it; in this case, he is worthy of praise.
And yes, there is a terrible human cost to fixing GM: