2009: The Coming Meltdown. Part One–The Auto Industry

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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Brett Weiss, a senior partner at The Weiss Law Group, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his colleague, Daniel Press, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the previous Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute and the Bankruptcy Bar Association of Maryland. He has received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, the United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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