MSU Law Faculty in the News
GM's Bridge Loans to Nowhere
March 22, 2009
Lansing State Journal Op Ed
By Anne Lawton, Associate Professor of Law
The General Motors bankruptcy debate should not be framed as a choice between rescue and disaster - a choice between more federal bridge loans and a slow and certain death through bankruptcy. The real choice is between a federal bailout outside bankruptcy, without any of the protections afforded by the bankruptcy process, and a federal bailout inside Chapter 11.
News writers and commentators talk about how a GM bankruptcy would cause customers to stop buying GM cars, suppliers to file for bankruptcy, workers to lose their jobs, and local taxing authorities to lose tax revenues. But those things already are happening.
In February, auto sales in the U.S. dropped by 41 percent. Unemployment is rising, auto workers are losing their jobs, and plants and other businesses are closing. Let's not confuse cause and effect. The economic crisis is a major cause of GM's woes.
Bankruptcy may be the solution.
GM's track record thus far suggests that it cannot accomplish what needs to be done outside bankruptcy. Its projections remain unrealistic. In December, GM's "worst-case" forecast for U.S. auto sales in 2009 was 10.5 million units. Two months later, its worst-case scenario got worse - 9.5 million units. Current estimates by Autodata for 2009 vehicle sales are 9.1 million units.
What would that mean for the taxpayer? More bailout money. GM estimates that it will need $30 billion in bailout funds based on its worst-case scenario of 9.5 million units. If sales continue to slump - a likely scenario - GM will need more money from the taxpayers to stay afloat.
Chapter 11 is not liquidation. Filing for bankruptcy does not mean GM goes out of business. Reorganization in Chapter 11 forces the parties to the table and enables a bankruptcy judge - an expert in dealing with financially distressed firms - to oversee the process.
In order to survive, GM needs the tools provided by bankruptcy law - the ability to reject unprofitable contracts, to reduce the amount paid on certain claims, and to modify the collective bargaining agreement and retiree health benefits.
Take GM's bondholders as an example. The success of GM's current restructuring plan depends, in part, on getting two-thirds of GM's bondholders to agree to exchange their bonds for GM stock. Without the bond exchange, a GM bankruptcy is likely. Yet, GM and the bondholders have not reached agreement.
Will they do so? Current media reports on the negotiations suggest an agreement is not forthcoming. In bankruptcy, bondholders would have less leverage. While they could vote to reject a proposed GM plan of reorganization, GM could "cram down" the plan on those dissenting bondholders, so long as the bankruptcy court decided that the plan met certain requirements.
Bankruptcy is not an easy process or a foolproof solution. But GM cannot realistically accomplish what needs to be done outside of Chapter 11.
The government "bridge" loans are bridge loans to nowhere.