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How Congress Could Save GM

posted by Elizabeth Warren

Ronald Trost is surely one of the sharpest minds in Chapter 11.  He negotiated the Chrysler non-bankruptcy bankruptcy back in 1979. (His work is highlighted in Moritz & Seaman, Going for Broke:  The Chrysler Story.  Jay Westbrook and I still use an excerpt from that book to introduce Chapter 11 negotiations to law students in our casebook.)  Ron is now Of Counsel with Vinson & Elkins, and he's still one of the most creative people in the field. In fact, he's laid out a plan for reorganizing GM.   

The plan is ingenious. Believing that there's not enough time left to negotiate a consensual Chapter 11 for GM, Ron has an alternative. He takes the best elements of Chapter 11, then short circuits much of the negotiation process to reflect the current economic realities. He shows how Congress could pass a law to resolve many of the most intractable problems, offer government guaranteed financing, and effectively impose a rapid settlement on all the parties.  It is a tough-love solution that imposes some pain on everyone, which is exactly what we should expect from a tough-love kind of guy like Ron. 

Read the piece because Ron has a very interesting idea for saving the auto industry.  But for those Chapter 11 afficionados who hang out on this site, read the piece because Ron offers us a vision of the limits of Chapter 11 and ways--in an emergency--to deal with those limits.

This is the first seriously new thinking I've seen: Tough love that might work.


How is the NewCo going to finance itself? I would have thought that there'd be some sort of rights offering that could be used to (1) give some payoff to unsecureds beyond equity and (2) recapitalize the NewCo. But this looks a lot like some of the ideas for a self-executing Chapter 11--just kick out old equity and give newco equity to the unsecureds.

What about the Rock Island Railway problem? Firm-specific bankruptcy statutes are unconstitutional. A statute designed for three firms? I'm not sure it is much better.

On the merits, my only quibble: why bother with government-guaranteed bank loans? Fear of soshlizm? I'd cut out the middleman, and have direct government lending. Why should a bailout be accompanied by unnecessary welfare checks to bankers? It's the student loan mess all over again.

Any piece that includes this: "while they attempt to manufacture cars that the public will buy while generating operating profits" is being written by someone with an ax to grind.

The auto industry has been profitable for most of the past 30 years and has been selling 8+ million cars. They have, obviously, been selling what people wanted to drive. Now those who want to see it as a moral failing in industry for not being green enough want to punish the firms, not their customers.

What was the alternative? Selling cars people wouldn't want to drive? Robert Reich is currently also offering an "eat your spinach" plan for the big three. What happened to the free market that is supposed to be the basis of our capitalist system?

This plan looks to me like yet another way to destroy what little is left of the industrial union base. That this appears on Sorkin's blog is not surprising since he came out with his own variation of this (complete with the same misstatements about the auto industry) in his column last week.

If you want to perform social engineering then make it part of a comprehensive government policy. Replace personal vehicle travel with mass transit. Replace exurban sprawl with clustered developments. Replace global transport of items that could be gotten locally (water from Fiji, anyone?).

Adding a carbon tax is also avoiding the issue. Just because something becomes more expensive doesn't mean that the "market" will develop a substitute. That is a hope, not a certainty. If you want to see a replacement for a liquid fuel based economy then fund the appropriate R&D directly, don't expect that the market will magically produce a solution.

The US government finds nothing wrong with supplying the aerospace industry with contracts for useless military hardware on a continuing basis so that they have the cash flow needed to develop new commercial aircraft. The government also sees nothing wrong with subsidizing the corn-based food industry (grain, cattle, chickens, pork, high fructose corn syrup and ethanol).

There is no rational industrial policy. Those with the most political clout get the handouts. Apparently the age of "What’s good for the country is good for General Motors, and vice versa" is over. Detroit just has lost its political clout, that's all.

GM Prez said BK was not an option because it would erode consumer confidence and “we want them to be confident in their ability to buy our cars and trucks.” So then he says ... "to win, you've got to win with product and technology. ... And we do not want to give consumers a reason not to buy our cars and trucks." What the heck does Bankruptcy have to do with people wanting to buy their cars?

The auto industry's argument goes that nobody would be confident in the industry's ability to provide aftermarket parts and servicing if the industry had gone through bankruptcy. As a matter of logic, I think it parses. However, I think it is weak empirically, especially if Uncle Sam provides DIP financing.
So I agree with you it is a crummy argument. But it is an argument of sorts.

Not sure if the Times will post this, so I'll be redundant and copy this here:

The entire concept of something being too big to fail needs to be reconsidered - and how it got that way should be a lesson for members of corporate boards, regulators and legislators. For too long they've been aggressively turning themselves into such entities, assuming in the back of their minds that they would never have to face the debacle of bankruptcy like "regular folks." That mind-set will cripple the decision making process; if you think you have a safety net, you won't make some of the tough decisions.

Any business entity that engorges itself to the degree its tentacles reach so deeply into an economy that it becomes too big to fail needs to be allowed to fail to prevent a reappearance of a similar entity. The examples of Fannie and Freddie shouldn't be ignored. The opportunity for some to turn themselves into multi-millionaires along the way to disaster should also be remembered.

The complexities of the Trost proposal are so esoteric that they're almost surreal. They don't address the real problem - the big three need new management and their directors should not be allowed to continue to play the game with taxpayer money backing them.

I haven't seen anything that even resembles a look toward director responsibility in this fiasco. Until we see major changes in who is in charge, any aid is utterly absurd.

Man, I heard a ton of stuff on CNBC last night. Although most of the topics about the Big 3 bailout we have already discussed here, one thing that did stand out in my mind. I forget the name of the man who said this but the gentleman from Houston pointed out that GM wants upwards of 13 billion but all of the stock of the Company is only worth 3 billion. If GM received that money, how on earth are they going to pay it back? “If” the US owned all of the stock, the companies stock would have to increase to 4x of what the stock is worth now to break even. To double our money the stock needs to rise to 8 times the current value… If the US owned all of the stock…. Right now the stock is low like 4.90 but in June of this year this year it was $16 per share down from an all time hi of $93 per share in 2000. So it does have a ton of room to move up. The question is, do we get ownership in the Co. or is it just a loan? If the Co. wanted to be independent and not owned by or in part by the citizens of the U.S., then Bankruptcy is the option they should seek. I know how negatively the “S” word is looked at by the right. Another thing is that GM gets 13B and lays off how many workers???? Like 30k something like that????

The Trost article is an excellent starting point for creative problem solving. Let's build on it by being much more explicit about proposed approaches/solutions to strategy, innovation, management and leadership. Yes, it's important to pay attention to the constraints on Big 3 economics posed by labor agreements, health care and so forth. But, this attention has been overdone. And, while there's been so much commentary on the tone-deaf CEOs, the larger and ultimately more essential issues of actual strategies, actual innovation, actual management and leadership necessities barely get any mention other than in the most abstract, generalized way.

Honda, Toyota and others make a success of the auto business. It follows, then, that success is possible.

Trost's article would be even better if it included performance benchmarks that required follow on identification of actual strategies and so forth.

As a bankruptcy attorney, I find much of the tone and substance of Trost's proposal troublesome. Why is there such a concerted effort to keep the automakers out of the bankruptcy system? Under a so-called "free-fall" bankruptcy with the government providing the DIP financing, Trost argues that the case could "take years and end in a problematic result". I'm lost. What's the problematic result? Once financing is provided by the government, the automakers continue their day-to-day operations. While some jobs and suppliers will be lost, I fail to see how the world is going to end. The plan would not need the consent of creditors or other constituents? It is not clear to me how the most fundamental rights of creditors need to be suspended in this situation.

Chapter 11 is the result of almost 100 years of careful thought and effort. The ability for a company that acts in good faith to earn a discharge from its burdensome obligations in order to move forward with its business is a great thing. What has changed in the last four months to make our system inadequate in the face of the current crisis?

Trost is a very accomplished attorney. That being said, I do not see how anyone can sit down and draft a new bankruptcy law on the back of a napkin and be confident that soceity will be left with a better alternative to the laws that have been on the books for 30 years. Put the automakers in chapter 11 and have the federal government provide the DIP financing.

Let GM go under because they are too greedy! We can get by with Ford and Chrysler. They build better cars than GM anyways.

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