General Motors Death Watch 207: Saving General Motors

General Motors will soon be a ward of the United States federal government. Make no mistake about it. Without some kind of massive financial injection– not a mere few billion dollars but tens of billions– there’s no real solution to the problems of GM’s legacy of epic, chronic mismanagement. We know that day of a government bailout will come-– and much sooner than even Wall Street wants to believe. In fact, it’s almost upon us.

The Chrysler “absorption” only proves that when you confront normally sane men (though maybe not that smart) with death and destruction, they will resort to a nuclear option, even if it defies their own best interests. Kind of like saying “if we’re going down, everyone else is going with us.” And that makes government intervention inevitable.

When Congress faces the bomb lobbed by GM, it will react in predictable fashion: by making sure that every group gets a shot at the bailout dough. First, labor. Got to protect jobs, especially high paying union jobs. That’s the street cred of the Democratic party. Second, the huge Midwest industrial base of suppliers. They’re vital to keeping the behemoth going. Third, dealers. Can’t throw them out on the street; every state has too many GM dealers already and most of them donate significantly to their respective state and federal politicians to keep their franchises safe from greedy automakers. Finally, all of the associated vendors that now pray every month that GM pays their bills. Well, they can’t be ignored either.

GM’s got a ton of allies in this fight. Besides the aforementioned groups, the biggest supporter of a massive government bailout may turn out to be the national and local media. GM spends upwards of three billion dollars on advertising in the United States every year. Its dealers spend god-knows-how-much additional millions on local TV, radio and print every wee. If that money disappears, there’s gonna be a world of hurt applied. So, sure enough, media owners (think Gannett, Viacom, GE-Universal, Comcast, your local newspaper, etc.) will lobby hard to make sure GM stays in business as is.

Keeping General Motors afloat with government dollars (i.e. your tax dollars) will be done in a manner that keeps the status quo. Same brands, same dealers and few job losses.

Of course, that’s exactly the wrong way to do it. Nothing will change. And while GM might make it through the short term, everything that’s wrong with the company today will merely continue on into the future: too many brands, excess dealers and a labor force that lives by entitlements. And let’s not forget about an executive management team that got us here in the first place. They’ll stay too.

There is an alternative.

The feds should arrange a pre-packaged bankruptcy of General Motors, whereby the Federal Government provides 100 percent of the Debtor-in-Possession financing. No one else can participate. Not private equity (think Appaloosa with Delphi), not the money center banks, and definitely not any investment banks (oh wait, they’re already gone).

GM must shed its excesses that have become unmanageable. TTAC and others have talked about this ad nauseam. Without a bankruptcy, there’s no way to rearrange GM’s balance sheet (without a nasty cram down of the current lenders, and that takes time and politics), wipe out the existing equity (not much left there), and simply get rid of the unnecessary brands and dealers. The laws can’t change just to accommodate General Motors and accomplish any of this if the corporation and its North American subsidiary remain intact and out of bankruptcy.

With a prepackaged bankruptcy-– overseen by a governmental administrator with an independent Board of Overseers-– GM can quickly emerge as a viable, but smaller company. Jobs will be lost. Factories shuttered. Suppliers and dealers will disappear, but not all. (Dealer franchise contracts are deemed executory contracts and can be terminated in a bankruptcy without compensation.)

The key point here: none of the existing GM stakeholders today would have an alternative option under this bankruptcy scenario. There simply aren’t any other lenders willing to provide GM any financing while in bankruptcy, and that would lead to a liquidation for which stakeholders wouldn’t get much. Hence, the government can and should dictate the terms everyone gets if it provides the debtor-in-possession funding.

This plan would cost less to the government (that’s you and me) than a politically-crafted bailout to keep General Motors afloat “as is.” A reorganization exit plan would also bring in new equity and debt to replace all government advances. GM would emerge as a living and breathing entity, not as a dead-corpse walking, as in any other government plan.

And that’s how the nuclear genie at GM can best be contained. Now, if only Washington DC would listen.