If this week’s events are any indication, it may no longer be a question as to whether General Motors Corp. and Chrysler, LLC. will file bankruptcy, but rather when and how long that bankruptcy will last.
On Monday, the Obama Administration forced out General Motors Corp. Chief Executive, Rick Wagoner, with the threat of withholding additional bailout money from the automotive giant. This can be viewed either as a reaction to recent public outcry against executive bonuses and their pay, or a sign that the government has decided to rethink its philosophy regarding the distribution of bailout funds, including whether or not further bailouts are merited. I tend to view it as the latter.
On a side note, I must first point out that French automotive company, Peugeot Citroen, ousted its Chief Executive, Christian Steiff, on Monday, citing a need for a change in leadership to realize the company’s potential. Peugeot Citroen is Europe’s second biggest auto maker by volume. This removal highlights the fact that the continuing decrease in consumer auto sales is much more than a domestic problem.
However, here in the United States, Wagoner’s removal was followed by a press conference in which the President showed exactly how far his administration is willing to delve into the U.S. automotive business. The Administration’s auto task force criticized then rejected both GM and Chrysler’s plans for restructuring their businesses. The Administration made it clear that it believes that Chrysler will not be able to survive on its own, which has prompted Chrysler to amp up talks of a possible partnership with Italy’s Fiat. More importantly, the President openly discussed the possibility of bankruptcy for General Motors Corp., and the effects of such a bankruptcy. The President’s willingness to openly discuss bankruptcy as an option suggests that the Administration may now begin to realize that an amicable resolution of the problems facing the automotive industry is not possible.
In addition to taking an integral role in the restructuring of the American automotive industry, the Administration announced three government programs aimed at jumpstarting domestic auto sales. First, the President stated that the government would honor any warranties from General Motors Corp. and Chrysler, LLC. in an effort to encourage Americans to purchase their cars. The President also announced a proposed program that would provide cash rebates to individuals for the purchase of a new more efficient car upon the trade in of an eight year old vehicle, or a vehicle getting eighteen miles to the gallon or worse. Finally, the President highlighted a program to provide tax deductions of sate and locals sales taxes paid on the purchase of a new vehicle.
From a political standpoint, the President may be better served forcing the auto companies to enter into Chapter 11 bankruptcy. If the Administration continues to become more involved in the restructuring efforts of GM and Chrysler, one of the problems that it will undoubtedly encounter is the unmanageable cost of United Auto Workers union retiree benefits. Given union retirees reliability as Democratic constituents, it may be unlikely that President Obama will take the hard line stance with the UAW to gain concessions, which are most likely necessary to allow these companies to survive. Another component to these events and the likelihood of bankruptcy is the “forced” partnership between Chrysler, LLC. and Fiat. Our President may face harsh criticism if the government provides future bailout funds, composed of the American taxpayers’ dollars, to a company with such a large foreign component.
From a legal perspective, the argument is quite simple. Business reorganization/restructuring is exactly why we have Chapter 11 bankruptcy. Admittedly, a bankruptcy filing by an automotive figurehead such as GM would result in the largest bankruptcy proceeding in the history of American jurisprudence. However, bankruptcy court is the designated arena for the shareholder, worker and creditor disputes that ultimately prevent an amicable restructuring of a company. Furthermore, a problem of this size and complexity is better served via the clearly defined procedures of the bankruptcy court, as opposed to the political influences and whims of Washington.
Do the above referenced events mean that bankruptcy is certain for General Motors Corp. and Chrysler, LLC.? I would say only time will tell, but time is precisely what these automakers may longer have, as Present Obama has given GM and Chrysler deadlines of sixty and thirty days respectively to provide a restructuring plan that would justify further government support.