GM Makes A Case For Bankruptcy

They’ve been putting it off for months, perhaps years, but the inevitable seems to have arrived: General Motors should file for Chapter 11 bankruptcy.

Yesterday, the automaker disclosed that they lost $9.6 billion in the
fourth quarter of 2008 up from $1.5 billion in the same quarter a year earlier. Moreover, GM burned through $5.2 billion as revenue shrunk by one third.

Six Straight Quarterly Losses, Four Consecutive Years

For the sixth straight quarter and for the fourth consecutive year, General Motors lost money and they lost it big. For the year, GM lost $30.9 billion, its second worst loss ever. As of December 31st, GM had $14 billion in cash on hand which included the first installment of $4 billion of taxpayer money. Since then, GM has received an additional loan of $9.4 billion and is seeking $16.6 billion more.

Clearly, General Motors does not have what it takes to survive at least in its present form. The company has sounded the alarm that customers won’t buy vehicles from a bankrupt company but it looks as if those warnings are keeping customers away anyway.

Chapter 11 versus Chapter 7

Chapter 11 bankruptcy would allow GM to restructure while Chapter 7 would force GM to liquidate (or go out of business). But even Chapter 11 could be a difficult thing to pull off given that it can take as long as two years for everything to shake out. Clearly, GM doesn’t have the luxury of time being on its side, thus a government backed restructuring could square things away in as few as two to three months.

Under bankruptcy, GM would still need to renegotiate its labor agreements with the United Auto Workers, Canadian Auto Workers and other unions. From what I’ve read, they can’t be forced to go with any particular plan, but they’ll likely agree to deep concessions if the alternative is no jobs left.

Renegotiate Agreements With Suppliers, Etc.

At the same time, GM would need to open up its agreements with suppliers, many of whom are also in tough financial shape, suggesting that there could be a whole wave of bankruptcies taking place at the same time. Bankruptcy may make it easy for GM to extract itself from tough state franchise laws while also looking for an out to shut down Saab, Hummer, Saturn and other businesses and brands that are a drain on the company’s bottom line.

Finally, GM bondholders would be forced to swap debt for basically worthless GM equity a move that the automaker is currently negotiating with the UAW.

Source: GM Corp.