Hey, Congress: 'Prepackaged bankruptcy' for automakers is bad idea -- and impossible

by Nancy Crawley | The Grand Rapids Press

Friday December 05, 2008, 12:06 PM

AP File PhotoFlags fly at GM headquarters in Detroit.

The fantasy won't die.

For some reason, people cling to the idea that General Motors Corp. and Chrysler LLC should just march into bankruptcy court with a pre-packaged deal and wipe away their problems.

Today, you will hear that run like a current through members of Congress as they interrogate the carmakers' CEOs asking for bridge loans.

This persistent pipe dream pops up not only in the halls of Congress, but in blue-collar bars down South and in classy California cafes, usually right after someone at the table finishes complaining about a problem they had in 1975 with their Delta 88.

This is a simplistic and wrong-headed idea. A pre-packaged bankruptcy is impossible.

"The Lions have a better chance of winning the Super Bowl than GM has of getting a pre-packaged bankruptcy," said John Wykamp, a business-restructuring expert at the Grand Rapids office of Crowe Horwath LLP.

A pre-packaged bankruptcy means all creditors and other stakeholders must agree on the outcome before a company files for Chapter 11 reorganization. Then, the case slides through the court in a quick, surgical stroke. Not everyone gets their money, but you get to skip the fights.

Except, this time, an army of car dealers, parts suppliers, service vendors, bond holders, lease holders, creditors and, of course, unions would have to hold hands and sing from the same hymnal. Just drawing up the list would be mind-boggling.

There is just not enough time for a process that in a simpler case would take many months.

"Even with an infinite amount of time, you couldn't get that level of consensus," Wykamp said.

In fact, no one bothers to venture a guess at how long this nightmare would take, since GM and Chrysler would be history long before then.

There also is the phenomenal cost of this complex filing. Where are the deep pockets at GM and Chrysler -- both just barely hanging -- to pay for this?

And who would supply the money -- called debtor in possession financing -- that keeps the carmakers operating during Chapter 11?

The Wall Street Journal estimates such financing would run about $40 billion. Even if there were credit available, and there isn't, that's a huge amount. So the government -- i.e. taxpayers -- would have to provide that money.

And a bankruptcy filing would scare away the last few customers from dealers' lots -- surveys already have established this.

Finally, it would send many other businesses into a tailspin or even liquidation -- parts suppliers, hotels, restaurants, cleaning firms, all the companies that depend on work from GM and Chrysler.

"You can't look at this strictly from a GM, Chrysler or Ford point of view, you have to look downstream," said Dave Distel, who directs the Grand Rapids office of the turnaround consultants O'Keefe & Associates. "Working capital is short right now, a bankruptcy could push (those suppliers and vendors) over the edge."

Ford Motor Co. has not been included in the "prepack" bankruptcy talk since it secured loans before the crisis and believes it can hang on until the market stabilizes.

So why does this fantasy elicit such loyalty in Washington and elsewhere?

These often are people who didn't make a peep when Citigroup or AIG just raised their hand over a weekend and got a check by Monday for bailout money.

AP PhotoSenate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., left, and the committee's ranking Republican, Sen. Richard Shelby, R-Ala., listen Thursday to testimony on Capitol Hill during the committee's hearing on a bailout of American automakers.

But there is an alluring simplicity to the idea that this auto mess could be wrapped up in a tidy package with no surprise endings and a satisfying dose of self-righteous scolding. After all, everyone knows how to build a car better than Detroit, even if Detroit sells more cars than any other city in the world.

Others, of course, would cheer any bankruptcy that would bust the United Auto Workers union.

And others prefer a bankruptcy, prepackaged or not, because they believe government in a free market should not intervene -- a curious idea as the government is urged to take over banks, insurance companies, mortgage lenders and, as of this week, apparently set mortgage rates. But, hey, these businessmen wear white collars, so it must still be capitalism.

Another option makes more sense, said Distel, who also is president of the West Michigan Turnaround Management Association.

"A federal oversight board could be a better solution," he said. "It would control how the loans would be dispersed, allow the government to monitor the restructuring, and bring parties together outside of court.

"If you hold the checkbook, that has the most leverage."

In fact, the restructuring is under way: the UAW made major concessions last week; the long list of suppliers is being trimmed and nameplates are being proposed for retirement.

Yes, more sacrifice is to come, but the idea of forcing a bankruptcy, however gift-wrapped, is a very dangerous mistake.

In this incredibly fragile economy, it is irresponsible to throw such a huge industry on the bonfire and not think the rest of America won't get burned.

E-mail Nancy Crawley: ncrawley@grpress.com