The Road to Saving GM and the Taxpayer lies through Bankruptcy
By James A. Kohlberg

Mr. Kohlberg is the Chairman of Kohlberg & Company, a private equity firm, and a member of the Board of Directors of the New York Times Company.


There has been much discussion in the press lately about whether or not General Motors should be saved and if so, how. Bankruptcy has been much debated. There should be no debate.

The facts dictate an inconvenient truth: A GM bankruptcy is both inevitable and necessary. Only in an organized Chapter 11 workout can the company restructure both its 43 billion dollars of debt and its labor, dealer and legacy costs that cripple it as a viable competitor. And it is only in bankruptcy that tax dollars can be adequately protected by being the D.I.P. (debtor in possession) lender that ensures our bailout loan has a snowball’s chance in Hades of being returned to the Treasury. While Governor Romney’s op-ed of a week ago articulated many of the things to be done, it did not specify what role the government should have in a bailout or how to protect the taxpayer. With the auto companies testifying again before congress this is of paramount importance.

Here is what needs to be done:

1. Most or all of GM’s debt needs to be converted to equity. A company that is devouring billions of dollars of cash a month, 11bb in the last nine months alone, cannot support debt, much less $43 billion worth.

2. While the UAW has made concessions in the last two contracts, it is too little, too late (blame management not the unions) and these contracts must be brought to parity with other workers of similar plants and industries.

3. The employees (probably through an ESOP, an employee stock ownership program) and the debt holders should own the company, lock, stock and barrel.

4. Management and the Board of Directors must be replaced.

5. The company must drastically restructure, closing plants, cutting jobs, shedding unprofitable brands and closing dealerships. As an example GM has over 7000 dealers, Toyota has less than 2000.

6. The US Treasury should provide adequate financing for the bankruptcy, including guarantees of warranties for GM cars and trucks if, and only if the above conditions are met and the taxpayer can have an adequate hope that its money will not go to either subsidize debt holders or a corporate structure that has been mismanaged at nearly every level.

7. The US Government (and perhaps many State governments) must make a commitment to purchase 100% of their future vehicle requirements from US manufactures that meet low and zero emission standards, starting in 2010 and continuing for ten years. If this demand is created it will allow our manufacturing base to invest in meeting this market-creating demand, drive down costs to make these cars competitive with combustion engine vehicles, thereby creating both the jobs and energy independence the incoming administration says it desires. Only this last commitment will make the effort, sacrifice and treasure spent on pulling GM back from the brink worth it in the long run. Otherwise, in five years, ten or twenty, GM will be back again with its executives coming to Washington with another, bigger tin cup.

8. Last, the time has come for the American people to face the unsustainable truth: we cannot continue to pay for vehicles that create climate change, send billions of dollars to the Middle East thereby endangering our security, and borrow the money to pay for these vehicles from China, the Middle East, Europe and the rest of the world. Markets are exceptionally good at allocating costs and capital when all costs are taken into account. Without regulation, markets tend toward monopoly. Without all costs explicitly allocated, markets tend toward subsidy. We are behaving no different than Venezuela or Iran in this matter, both countries which subsidize the price of gasoline to their citizens. Because we do not allocate all the costs (defense and climate costs) of maintaining the free flow of oil to the users of oil, we subsidize our petroleum users, thus guaranteeing its overuse and preventing greener, cheaper technologies from being developed. Therefore, either a gas or carbon tax or both are needed after our economy emerges from recession.

Only the will and leadership is required. If not now, when? If not us, who?

Category: Bailouts, BP Cafe

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “The Road to Saving GM and the Taxpayer lies through Bankruptcy”

  1. Reinko says:

    This is funny:

    We will have day in day out American police chasing US criminals in high milage vehicles?

    And so on the state and national police documentaries the criminals in their high speed cars will always win?

    Please get real: Bankruptcy of the car sector is not that relevant, the only thing that will make a difference in the USA is a bankruptcy of the Federal Government. For the rest; it is peanuts…

  2. Brendan says:

    I must say: This article really gets to the point nicely. This one need to be printed over and over again until everyone gets it in their head that yes, we need a manufacturing base in this country to remain competitive in the world economy, and yes we need to have a vision of moving to the forefront in technology for it to be meaningful and we need to stop squabbling over half truths. This isn’t just about G.M.’s management.

    @Reinko: My understanding is that most larger cities (including my own, which isn’t exactly at the forefront of progress) have all but banned high speed chases, because the danger posed by a high speed chase is generally far higher than the danger posed by the criminal him- or herself. Police use helicopters and spike strips or count on catching the criminal later as they would any other crime that they weren’t present at. The good ol’ days of watching that “1984 suspicious vehicle” being chased on Cops has been slowly ending for a long time now; we only get the low speed “O.J.” chases now.

  3. philmckee says:

    Damn It.
    This to do list is so obvious. Why can’t our elected representatives get the message and do what’s right for America?

  4. KVanHim says:

    #7 sounds a little protectionist…why not open it up to any carmaker that meets a certain standard?

  5. deanscamaro says:

    to philmckee:
    The elected officials do not have the balls to do what needs to be done for America, just as the auto exec’s didn’t have the balls to do what needed to be done to get rid of the legacy wage, benefits and retirement costs that are totally out of reason and that are dragging the companies down. I think the Congressmen are just shoving the right decision out into another Administration and hoping the Tooth Fairy will sprinkle magic dust on the problem.

  6. ya know, it’s interesting, there’s been a documentary produced: “Who killed the Electric Car?”, yet, if one were to ask: “Who killed the CNG vehicle?”, one would receive, for the most part, blank-stares, or confounded–”What do you mean?”–responses..

    Mr. Kohlberg’s Plan is Forthright, and Sensical, though, he is overlooking the Fact that Honda’s Civic GX is the ‘greenest’ car available, and its available Today.

    As well, a fleet-wide CNG retrofit, released into the ‘wilds’ of the tuner-crowd, would provide gainful employment for many, and have the potential for sparking a rejuvenation of our Manufacturing Sector-writ large..

    who has bets that that ‘Ace’ ain’t even in the Deck?

  7. larster says:

    A member of the NYT board is opining on how to save the auto industry. Pleaaaaaaaaaaaas!

  8. Reinko says:

    To Brendon:

    It is now a day later, but that is good news because here in Europe there are still all those ‘chasing documentaries’ on cheap commercial television. Lets hope they are gone in a few years time because when you turn crime into entertainment in the long run nothing good will flow from that.

  9. dawg says:

    now that the bailout has started,i’m more than angry. i ‘m as patriotic as can be but i just e-mailed GM and informed them that i will never buy another american car and i hope others will follow suit. today’s action will start endless “loans” of money to a failed industry.GM needs to know their little plan had unintended consequensces.