As early as this summer, when the 
government was beginning to bail out the financial sector, vice chairman of General Motors, Robert A. Lutz, commented that the government should help his company with monetary support. Now, after reporting a loss exceeding $4 billion last week, GM stands on Uncle Sam’s doorstep, hand thrust out, asking, “Buddy, can you spare some Change?”
In its latest statement, GM said that it could run out cash before the end of the year, raising questions about the nation’s largest automaker as a going concern. Nonetheless, General Motors has maintained that it is not considering bankruptcy. Why not?
Their position seems to be that transitory external factors have caused the problems at GM. In particular, CEO Rick Wagoner has equated the spike in oil prices, which he claims is the cause of the company’s woes, was akin to an act of God. It appears that economic experts are agreed that some form of government action to forestall the failure of General Motors (and presumably Ford, who also reported losses exceeding $2 billion) is warranted under these circumstances.
It was my understanding, though, that Chapter 11 of the bankruptcy code is precisely for situations like this. Where a company finds itself caught out because of external factors that are not related to the management of the company, reorganization makes sense. The idea is to give the company a temporary respite from its creditors, to grant it some “breathing room” to get its financial house back in order. If General Motors is a viable business (and there’s every reason to believe that the making of automobiles can be profitable), then relief through a temporary stay might just make all the difference.
However, other companies were not similarly affected by the spike in oil prices. It would seem that the fact that GM and Ford were focused so heavily on the heavy vehicle market, and incidentally reaping huge profits in that segment (what happened to all that money?), made them blind to the economic realities building around them. Note to management: Next time we (or anyone) goes to war in the Middle East against a major oil producer, shift production to more fuel-efficient vehicles. It is highly questionable to assert that the problems at these companies is not management-related. In such a case, where the defect is in the front office, bankruptcy cannot be effective. It will only stave off ruin temporarily while subjecting creditors to their own potential liquidity problems. Once the stay is lifted and the company emerges from bankruptcy, it is unlikely that the same management team would suddenly prove themselves successful.
But, this is true of a government bailout as well. Why should the American taxpayer bear the brunt of General Motors’ poor management decisions? Especially given the fact that the company is likely to blow through the money and find themselves back at the trough at some point in the near future. Meanwhile, the taxpayer will have been saddled with higher taxes and made less able to purchase the products that GM and Ford manufacture.
In 1953, then CEO of General Motors, “Engine” Charlie Wilson famously quipped, “[F]or years I thought what was good for the country was good for General Motors and vice versa.” Someone needs to make the case that saddling the taxpayer with the responsibility of bailing out the automaker’s management is good for America. At this point, the case has not been made. Bankruptcy, whether Chapter 11 or Chapter 7, right now looks to be inevitably in the future of GM – better now before we add an additional tax burden on top of the failure than later with the added expense of having to absorb GM’s default on the bailout.
RSS
