Wednesday, May 27, 2009

U.S. Auto Bankruptcy: Good Money Chasing Bad

On December 4, 2008, my colleague, Ed Morse, and I wrote an essay calling on the U.S. federal government to let the marketplace work in terms of the potential bankruptcy of GM and Chrysler. Since that essay was written, the federal government has funneled good money after bad to the tune of $20 billion to $30 billion.


As of this writing, Chrysler is in bankruptcy proceedings and there is a 99 percent likeihood that GM will likewise declare bankruptcy. GM's bankruptcy is moving quickly forward due to GM bondholders rejecting the plan to exchange their bonds for GM stock. The GM bondholders have correctly assessed that they will do better under bankruptcy proceedings than under ownership of the "sinking ship." Who could blame them? Well the Obama Administration could and does.

In the Chrysler crisis, the Obama Administration forced secured bondholders to accept a deal that only a Washington Mutual stockholder would agree to. Essentially, the Obama Administration is attempting to abrogate bankruptcy law by strong arming Chrysler bondholders into accepting less than they would have received in statutory bankruptcy proceeding. Well, it is not working with GM as GM bondholders reject the extortion attempts from the Administration.

The Obama Administration must accept the fact that not only does this activist policy approach not work, it produces exorbitant costs for the taxpayer. "Too big to fail" should be replaced by the shorter and more accurate "just too big."

Ernie Goss


Anonymous said...

There's another way to look at it.

1. Chystler unions agreed with Obama to foregive costs in exchange for stock. They owned over half of Chystler at the time.

2. The financial banks which owned about 80% of the bondholder holdings followed suit and took the stock.

3. The other 20%, were stubbern and wouldn't take the stock. So Obama walked them through a govetnment type of bankruptsy where you are right they got next to nothing. These guys were offered stocks as compensation for payment which was refused. They were offered 20 cents on the dollar, they said no. In the end and unfortunate for the 20% bondholders, they lost.

Best not to go against your last friend with the wallet big enough to bail you out.

factoringmaster said...

GM is one of the worst auto makers, I was expecting this to happen.