Tuesday, March 31, 2009


Professor Obama Explains Bankruptcy

In July of last year, Candidate Obama released the following statement:

“In recent weeks, I have met with the CEOs of both GM and Ford to talk with them about their economic challenges and about the need for everyone - from auto executives to the federal government - to work toward the energy and economic future the American people deserve… I have complete confidence that GM and our other auto companies will adapt and thrive in the 21st century economy if we bring real change to Washington and forge a true partnership together. That is what I intend to do as President.”

Well, if all the hype and bumper stickers are to be believed “real” change has come to Washington and GM and the Feds have never been closer. Nevertheless, I’m sensing the complete confidence has a waned: As of yesterday, that GM CEO is no longer and Obama [was] Stern With Automakers

The President even threw out the “B” word – Bankruptcy:

“Now, I know that when people even hear the word "bankruptcy" it can be a bit unsettling, so let me explain what I mean. What I am talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success; a tool that we can use, even as workers are staying on the job building cars that are being sold.

“What I am not talking about is a process where a company is broken up, sold off, and no longer exists. And what I am not talking about is having a company stuck in court for years, unable to get out.” TEXT - President Obama's remarks on U.S. car industry

Thank you for explaining the difference between Chapter 11 (reorganization) and Chapter 7 (complete liquidation). But, despite his inartful wording, the President would actually have very little legal say in such a proceeding because bankruptcy proceedings are the purview of the Federal judiciary – not the executive branch.

In this instance, the Federal government is not a shareholder but a creditor of GM. Under the terms of its loans to GM, it can call the loans if the automaker hasn’t complied with certain terms – notably an agreement by other bondholders and the retiree health plan to convert a significant portion of their debt to an equity stake in GM.

But the absolute worst position to be in during a bankruptcy is that of a shareholder. They are at the end of any line for handouts. Should these creditors give in to the government’s demands and then watch GM declare bankruptcy, they become a much smaller player (compared to the Feds) when any proceeds are dealt out to the creditors. They’re reluctance to do so – especially while watching the government unwilling to take an equity stake – is understandable. Bankruptcy has long been an acceptable tactic for these automakers – and is probably the best hope for their creditors too.

…and even though I didn’t go to Harvard Law, I do know enough about bankruptcy and our court system to have complete confidence in asserting that, in the event of a bankruptcy, GM will be “stuck in court for years” – many years.

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