A Brief Note Regarding GM

by von

Given the active back and forth on this blog regarding the auto industry bailout, I wonder what y'all think about President Obama's apparent belief that a GM bankruptcy is now all-but-inevitable:

President Barack Obama believes such a bankruptcy is the most likely way for GM to become a competitive automaker, people familiar with the matter said. To get needed U.S. aid without court protection, GM still has two months to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in a bailout plan last month.

More likely, the Detroit-based automaker will pursue a pre- arranged reorganization with the backing of enough workers, creditors, suppliers and dealers to smooth the way, advisers to the company and the U.S. auto task force said. This plan to control what is often an unpredictable, lengthy process may encounter surprise obstacles and delay, bankruptcy lawyers said.

Does this prove Sebastian's point?  Or were Publius (and Hilzoy) right, and a bailout was needed even though there was a chance that it might fail?  And how is Jon Cohn's credibility doing these days? 

Inquiring minds .... well, I have one.  Or two, since I have the luxury of not having an opinion on the subject.** (Well, I have an opinion regarding Cohn's credibility -- it's not good* -- but not an opinion on whether the bailout was a good idea.)

*A tip off came in Cohn's original articlefor TNR, when he wrote the following:

But the economists and industry analysts I tracked down this week vouched for CAR's integrity and suggested the group's estimate was in the right ballpark. Susan Helper, an economist at Case Western University and a specialist on the automobile industry, told me her rough calculations suggest the most optimistic outcome would be "just" half a million jobs lost--and that's only if the failures are contained to GM.

If you're citing Helper as an "independent" expert regarding GM, you might want to note that Helper works for GM.  This is what we call an "ooops."

**Full disclosure:  As the sidebar states, I am an attorney.  I blog pseudonymously, but my policy is not to take positions on matters of public interest that may even tangentially affect a Firm client.  Because we have clients that may be tangentially affected by the GM bailout -- or not -- I will express no opinion regarding the wisdom of the bailout.  I will express my sympathies, however, for the folks who are caught up in this mess (workers, suppliers, dealers, etc.).  May you recover quickly! 

Comments

[Gary Farber]

"And how is John Cohn's credibility doing these days?"

Small point: It's "Jon" Cohn. And you linked to the same piece twice.

[von]

Thanks, Gary. The mispelling was a typical vonian accident. I'll correct. The double link was on purpose.

[tgirsch]

I'd note for the record that the "bailout" of GM and Chrysler was mild by bailout standards. It came in the form of loans which get paid back before all other obligations in the event of bankruptcy, such that the end cost to the taxpayer is likely to be nil unless things really go to hell. And if they really go to hell, then a paltry $35 billion is going to be the least of their worries.

I liked the Daily Show's take on this -- keep a close eye on the $35 billion given to the automakers, but pay no attention to that $700 billion behind the curtain...

[J. Michael Neal]

I think that a bankruptcy, if conducted in an orderly fashion with an eye on minimizing collateral damage is probably what is necessary. Said collateral damage includes, but is not limited to, making sure that the parts supply chain isn't disrupted for all of the car companies by follow on bankruptcies among the suppliers. This has been one of my biggest fears with regards to the whole thing. If this goes badly, it could badly hurt all of the car factories in the country, not just those of GM and Chrysler.

I think that this process requires the active involvement of the federal government, not just a bankruptcy court. As a part of that, I don't think that it's going to cost us any more to do it now, after providing money months ago, than it would have to do it then, in lieu of that money. This would also go better if the Bush administration hadn't wasted the funds held by the PBGC.

[Matthew G. Saroff]

You cannot get a prepackaged bankruptcy, because you cannot get all the creditors on the same page.

This is a negotiating ploy to get Pimco in line, so they do not do what they did with the GMAC bailout.

[hilzoy]

Fwiw: I did not, in the piece von linked, actually argue for a bailout. I was writing about Will Wilkinson and his peculiar style of argument.

I thought a bailout was necessary, of course. But part of the reason for that was that there didn't seem to be any way to have a controlled bankruptcy. The administration hadn't done the planning, and as best I could tell, GM would just go into liquidation. There seemed to me to be a lot of advantages to bankruptcy -- e.g., the ability to break contracts with dealerships, and thus to reduce the number of brands to some sane number -- but if the price you had to pay was GM going into liquidation, that seemed way too high, given our existing economic condition (I mean, I would have felt differently had we been in a booming economy with no shortage of jobs, as opposed to trying to stay out of a genuine depression.)

The Obama administration seems to me to have done the work needed to make a controlled bankruptcy possible. They've backed the warranties, agreed to provide DIP financing, begun to explain what a controlled bankruptcy means to the public, and in a bunch of other ways actually gotten into the details and worked out what looks like a plan. For that reason, I think we have options now that did not seem to exist earlier.