Prepackaged Bankruptcy for Automakers
Smart:
“President-Elect Barack Obama‘s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.
Obama’s team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University’s law school who heads Obama’s economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.
U.S. lawmakers yesterday postponed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout as an alternative. Automakers such as GM could use court protection to reduce debt and reject unfavorable contracts.”
This remains the best option IMO for Detroit . . .
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Previously:
Looking at the 1980 Chrysler Bailout (March 2008)
http://www.ritholtz.com/blog/2008/11/looking-at-the-1980-chrysler-bailout/
Why a Reorg is Better for GM than a Bailout (November 2008)
http://www.ritholtz.com/blog/2008/11/why-a-reorg-is-better-for-gm-than-a-bailout/
Source:
Obama Transition Said to Consider a ‘Prepack’ Auto Bankruptcy
Linda Sandler and Jeff Green
Bloomberg, Nov. 21 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRfqFMhlj5lk&
November 21st, 2008 at 9:01 am
They just refuted this on CNBC.
November 21st, 2008 at 9:03 am
Hmmm… Perhaps the Messiah has no magic powers after all.
November 21st, 2008 at 9:11 am
Smart or just permanent campaign mode?
from the article
How Prepacks Work
In a prepackaged bankruptcy, an automaker would go into court with financing in hand after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed. The process might take six to 12 months, compared with two to five years if the automakers followed an ordinary Chapter 11 proceeding and worked out agreements under a judge’s supervision, Bane said.
Automakers would have to depend on government financing to restructure in bankruptcy court and probably couldn’t attract private loans until they were ready to emerge from the process, Bane said.
Officials of the three automakers told members of Congress this week that they had studied a pre-arranged bankruptcy, championed by Republican lawmakers such as Senator Bob Corker of Tennessee, before dismissing the idea as unworkable.
“We have looked at all aspects, whether it’s a prepackage, whether it’s prenegotiated,” Chrysler CEO Robert Nardelli told a Senate committee on Nov. 18. The options are all “more negative” than restructuring as a condition of receiving federal aid, he said.
Prepacks Rejected
Wagoner and Alan Mulally, CEO of Dearborn, Michigan-based Ford, also said under congressional questioning that their companies had studied and rejected the idea of reorganizing under court protection.”
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Chapter 11 is the only smart plan. All you interventionistas don’t worry, they will not be going into Chapter 11. There’s too many votes left on the table with that approach.
November 21st, 2008 at 9:17 am
Are there companies other than GM and F that would benefit (or hurt) from this? I can’t seem to find a good list of suppliers that will be affected if they go pre pack bk….thanks
November 21st, 2008 at 9:23 am
This is the politics of financial chicken … and nothing more. Do you really think Washington is about to let any one of the 3 U.S. auto manufacturers fall into bankruptcy? This is the largest manufacturing industry in the nation! Do you really think they are about to allow such chaos to be unleashed? Do you really think the best friends the British Empire ever had in Washington are going to allow chaos to reign as a Democrat who is reading Lincoln, who speaks of FDR and JFK, whose party controls both houses of Congress enters office?
GET REAL.
November 21st, 2008 at 9:32 am
How do you prepackage something this big? By the time you determine the details, one or all are gone. If the gov is going to provide the DIP financing and have to backstop, then why don’t we provide them with loans with strict caveats? Do go into bankruptcy just to let some ignorant lawmakers crow about bringing down the UAW is criminally stupid IMO.
November 21st, 2008 at 9:37 am
They do the bk , only thing that changes is legacy costs. Suppliers no changes, just cut the UAW pensions loose and make that a gift to we the people. Quick and concise, if they don’t remove the pension costs they are not viable.
November 21st, 2008 at 9:52 am
You are correct Rightline; the taxpayers will have to assume the risk and liability of pensions. As well as a massive re-schooling effort to displaced workers all over the country.
November 21st, 2008 at 10:50 am
Pensions and healthcare, you can’t forget the healthcare.
November 21st, 2008 at 10:50 am
Maybe market capitalization doesn’t figure into anything, but here it is anyway.
The market capitalization of: General Motors is $1.71 billion- http://finance.yahoo.com/q?s=gm
Ford is $3.46 billion- http://finance.yahoo.com/q?s=F
Chrysler produces an N/A- http://finance.yahoo.com/q?s=DCX.BA
November 21st, 2008 at 11:12 am
Am I the only one that read the bloomberg study saying that a bankruptcy would cost the taxpayers $100 – $200 billion?
http://www.bloomberg.com/apps/news?pid=20601087&sid=ad09qxbiElB8&refer=home
November 21st, 2008 at 11:25 am
Pre packaged BK is the only way. A straight loan is a short term bailout of the UAW not the motor companies, they will die anyway if they don’t restructure. No matter what happens, the taxpayer is going to take hit.
As long as the companies are restructured to be competative, as a taxpayer I am willing to pay a little extra to keep that massive industry in this country.
Whatever happens with the big 3 WILL BE the canary in the coalmine as for as Obama is concerned. Will he turn his back on special interest(UAW) and do what is best for this country and restructure. ie.”change you can believe in” OR will he bail out the UAW (short term)and screw the taxpayer..same shit different term.
This will be his first defining moment.
November 21st, 2008 at 11:27 am
that article is about liquidation not restructure
November 21st, 2008 at 11:55 am
Help is coming. It’s simply a matter of how and under what terms. Robert Reich is one of Obama’s advisors and you might point to what he has just written on his blog as a potential outcome.
November 21st, 2008 at 12:10 pm
As a registered Republican, I have made it a point to make fun of those TWO Barry the Commies, Obama and Ritholtz, every time I can for the next eight years. I will abide by my party’s policies and philosophies, no matter how history has demonstrated that they have been disastrous for my nation and countrymen, cuz I’m a registered Republican. I will ridicule Obama every chance I get no matter how much that black bastard’s intelligence, thoughtfulness, detail orientation, commitment to execution, courage, equanimity, morality, sense of fair play, inclusiveness, and general character and leadership save me and my loved ones from economic and other peril, and deliver my nation into prosperity and peace. I have resolved to curse Barry Obama every time I eat steak and lobster and drink a nice, cold, expensive imported beer in the party atmosphere of six years from now, when the bad times of 2008 are long forgotten. Hell, I have decided to ridicule Obama now, before he even starts office.
Cuz I’m a registered Republican.
November 21st, 2008 at 12:11 pm
how about CDS s? how will this effect the banks, aig maybe?
November 21st, 2008 at 12:24 pm
If Obama actually insists on a bankruptcy – - prepackaged or otherwise – - that’ll show that he has a lot more spine than I thought he did.
(On the other hand, if he gives them $125B in the process, that won’t be good).
November 21st, 2008 at 12:35 pm
jonpublic @ 11:12
“Am I the only one that read the bloomberg study saying that a bankruptcy would cost the taxpayers $100 – $200 billion?”
This is just more fear mongering.
In the words of Ronald Reagan, “just say no”.
November 21st, 2008 at 5:32 pm
The thread is probably dead but what I came up with is to buy AXL on hopes of a pre pack GM-F bk with suppliers kept not only whole , but seeing certainty return to payments with gov’t backing.
November 22nd, 2008 at 12:52 pm
They are clearly learning about what the options are. BR you’re wrong about bankruptcy as an option, packaged or otherwise. The notion that packaged means you enter and exit swiftly is an illusion. There are going to be a million and one issues, lawsuits and god knows what to resolve which means they will be stuck there for months. While this is going on their market share will collapse and revenue along with it. These guys are still making 40% of the cars in the US, do we really want to see this disappear because this is what will happen. What the bankruptcy advocates don’t get is that autos are NOT commodities like airline tickets. There will be a flight to quality. BR assuming GM was in C11 would you go and blow $50k on an Escalade? To ask the question is to answer it.
That said. It’s not going to happen. They will hang on until January 20 and then the new admin will rescue them on onerous terms but Obama will be seen as the hero of MI, IL, OH, IN and PA.