What Does Detroit Need to Do Now?

Just What is going to happen with Detroit bankruptcies?

I’m pretty confused about what Washington is doing/has done with the $700 billion and how that relates to the automakers.  Let call them the OEMs (original equipment manufacturers).  The OEMs claim they need help from the government or they might fail.  Officially, they don’t like the idea of bankruptcies, but they clearly have the ability to get legal advice from the biggest law firms in the world.  A Chapter 11 filing by any of them would be huge and attract the biggest bankruptcy firms around.  So, what if one (e.g. G.M.) filed Chapter 11? It would certainly be painful and scare people.  In a Chapter 11, they would have to adjust their operations and their model so that they could convince their creditors (or at least a Judge listening to their creditors) that their plan was “viable” and they would most likely survive under the Plan.  They could cancel contracts including, with some higher levels of proof, their union contracts.  They would have to negotiate to try to get an agreement with the Unions, but in the end, the Judge could terminate the contract or modify it.  The Unions could refuse to accept it and strike, which could kill the company, but that may be like putting a gun to their own heads.  Unions have been known to do that.

The suppliers would get hurt, too.  Amounts owed to them might be delayed or not paid (or paid only cents on the dollar).  There is a  lot that GM could do to keep the suppliers it needs in business if it makes sense for its new business model.  It could close plants, adjust workforce, eliminate waste and do other things to make it more profitable.

In the end, the government could provide financial help for the company’s exit from bankruptcy.  Or it could provide guarantees of exit financing bank loans.

A GM (or other OEM) Chapter 11 would facilitate the reorganizations that are needed.  It would be expensive (probably a couple billion in professional fees), but that is better than tens of billions being poured down the black hole of theur current business models.  Many are crying that an OEM “bankruptcy” will be an economic disaster and would cost millions of jobs.  That is a scare tactic.  Maybe it would costs many jobs.  Maybe it would hurt suppliers.  But what is the realistic alternative?  They must change and so far nothing the customers, the regulators, Congress has done has been able to make them change.  Now they are over the barrell and they, like so many others, say “this time we’ll really change.”  Yeah, right.