05 Jan 2009: The Coming Meltdown. Part One–The Auto Industry
In this four-part series, I will discuss the four areas of the economy that are likely to contribute to an ever worsening economy over the next year. I’m starting with the area of the economy that has received the most attention recently, the auto industry. Everyone knows that GM, Ford and Chrysler are in serious trouble. The recently approved request for a short-term bailout has been headlined and discussed in newspapers, TV, magazines and blogs.
What has received somewhat less coverage, however, is what will happen now that the Big Three have received at least some of the money they’ve been asking for. And the result isn’t pretty. There are some significant structural problems with the US auto industry that suggest anything short of bankruptcy reorganization won’t work. And even a traditional bankruptcy might not help.
The three biggest problems facing the auto industry are dealership agreements, retirement/medical funding issues, and the impact of a bankruptcy filing on consumers’ purchasing decisions. The first two issues have been discussed in extensive detail in the media. I want to talk about the third issue, bankruptcy, and how the Big Three can have their cake and eat it too.
The main concern voiced about GM, Chrysler and Ford filing for Chapter 11 reorganization is the perceived impact it will have on consumer buying. “If we file for bankruptcy,” the argument goes, “no one will trust us to be there for warranty or repair work, and they won’t buy our cars.” But there is a way to accomplish everything a Chapter 11 can do–including modifying dealer agreements and labor contracts–without filing for Chapter 11.
How? It’s rather simple and obvious, really, and simply plays upon the power and impact of…words.
Since it is the word “bankruptcy” that scares everyone, rather than the reorganization benefits that Chapter 11 offers, have Congress pass a new law, say the “CAr Manufacturer’s Employment and Reorganization Act of 2009″(“CAMERA”), which allows the Big Three to do everything a Chapter 11 allows, without calling it a Chapter 11 or a bankruptcy. In other words, the statutory provisions that a Chapter 11 provides for would be largely copied, placed in a new statute, and called something other than bankruptcy, making it a statutory reorganization without bankruptcy.
There is precedent for this. The Chrysler Corporation Loan Guarantee Act of 1979 contained provisions that required creditors to make certain “concessions” to Chrysler, concessions similar (if not identical) to those that would occur in a traditional Chapter 11. Chrysler used these statutory non-bankruptcy provisions to great effect, paying off more than $600 million in debts at just 30 cents on the dollar. It converted nearly $700 million in debts into a special class of preferred stock that earned no dividends and was unredeemable for several years. Nor were Chrysler’s employees immune from this “non-bankruptcy” bankruptcy: about half lost their jobs.
This seems too obvious, it might be argued. How can calling this reorganization something other than bankruptcy while allowing the same things really make a difference? Won’t this subterfuge be obvious? Won’t the pundits still call it a bankruptcy? They didn’t in 1979, and won’t today, if the legislation is couched appropriately. It could, for instance, allow a “Car Czar” or other trustee to take various actions that amount to Chapter 11 reorganization without the Big Three actually having to file, or the process can be hidden in regulations or authorizations. This gives the auto manufacturers “cover” to state that they were reorganizing under the auspices and requirements of the U.S. Government, not filing for bankruptcy relief. And how many people are familiar with what Congress required or allowed to allow GM and Chrysler to receive their December 2008 reprieve?
Such a process would seem to allow the best of both worlds: the ability to shed dealerships and nameplates without the billions of dollars of damages that would result in “normal” business operations, and restructure labor agreements, all without the specter of an actual bankruptcy filing.
Yes. It’s just words. But words are powerful things, with deep and pervasive meanings. While a rose by any other name would smell as sweet, so would a bankruptcy under any name but “bankruptcy” give the Big Three the ability to reorganize and, it is hoped, find a successful, profitable, future.
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