Specter of bankruptcy rears its head

After Senate Republicans dashed the Big Three automakers’ hopes for a congressional bailout last week, General Motors decided it was time to begin seriously exploring a Plan B. Company executives turned to the biggest name in corporate bankruptcy.

Harvey Miller, who has worked on mega-cases like Lehman Bros., Enron and WorldCom, is now advising GM on whether to file for Chapter 11 protection.

While the White House has suggested that financial help may be on the way, perhaps in the form of an $8-billion bridge loan, the Detroit automakers still have no guarantee of a federal lifeline.

If GM does file for bankruptcy protection, Miller’s prowess is sure to be needed. The case would be unprecedented and no doubt controversial. GM owns physical assets worth about $160 billion, it directly employs 90,000 Americans and is an integral part of the U.S. economy.

No bankruptcy case has ever dealt with all the serious factors GM could face — from workers to assets.

Taken as a whole, the bankruptcy could be a Goliath, costing the company millions in legal fees. In a series of interviews with bankruptcy experts, including those who support GM filing for Chapter 11, all say a successful trip through bankruptcy court would not be free from pain. These bankruptcy authorities say any outcome could easily involve significant layoffs; cuts in workers’ wages and benefits; and deep wounds that would reverberate throughout related industries.

To avoid liquidation, the company would have to pare its operations. Such a process, with all its complexities — thanks to the auto giant’s vast and complex interconnections with suppliers, dealers and unions, coupled with its network of physical assets like assembly plants — could take years. The psychological effects on the American psyche could cut deep.

“These [auto] companies are so big,” said Robert Lawless, a bankruptcy law professor at the University of Illinois at Champaign Urbana. “You’d hate to throw around the word ‘unique,’ just like with Enron and Lehman Bros. … but I think the same thing would be true if an automobile company goes.”

GM CEO Rick Wagoner has worked to stave off a bankruptcy filing, citing fears that the company’s core problem, selling too few cars, would only get worse after filing for Chapter 11.

Aside from a home, a car is the most expensive purchase Americans make in their lives. It is not considered a casual purchase, like a domestic airline ticket or a household item. So the car company would need to take serious steps to reassure potential buyers that it can outlast the car.

When Hyundai Motor Co. teetered in 2000, for example, it instituted a 10-year warranty to prop up consumer confidence. GM might also be forced to slash sticker prices.

Wagoner has also alluded to the costs of filing for Chapter 11. Top-flight bankruptcy lawyers command hundreds of dollars an hour in fees. The specialist lawyers handling Enron, one of the biggest bankruptcy cases in history, were paid $688 million for their work. GM’s bankruptcy would likely be more complicated, which means comparable or even higher fees.

Supporters of a government-backed bailout as an alternative to bankruptcy point to the costs taxpayers and government would incur from a bankruptcy filing. According to a study by Anderson Economic Group, a business advisory firm, if all three automakers sought protection from creditors, states and the federal government would lose $70 billion in taxes in the first two years of bankruptcy. The study assumes 1.8 million jobs lost in the first year.

“When you consider [a government loan] is a self-financing-type loan,” said David Cole, chairman of the non-profit Center for Automotive Research, “the taxes the [Big Three] pay by working is more than adequate to cover any required bridge [loan]. Forgetting about politics and philosophy — this is really a self-financing type of activity.”

The glimmer of hope for GM that emerged from the White House on Friday was that government officials would use some of the $700 billion in bailout funds allocated for Wall Street to tide over GM and Chrysler until the next Congress and the Obama administration. Ford says it has enough cash to survive.

But even if the White House does extend a temporary lifeline, bankruptcy could still be on the table. According to some bankruptcy experts, that wouldn’t be a terrible idea for the automakers.

John A. E. Pottow, a professor at University of Michigan School of Law, explained that under Chapter 11, auto companies would be given instant breathing room from creditors, while allowing them to act more swiftly in renegotiating union contracts, trimming operations and reaching agreements with creditors. That’s an “unhappy reality,” he said, but a necessary one.

Blood-letting, Pottow said, is not the mark of failure in bankruptcy. “Success doesn’t mean people won’t be fired and plants won’t be closed,” he said. “That’s something different than success in bankruptcy.”

Cuts would be imminent if GM filed for Chapter 11 protection. The question is how deep would they run.

GM employs some 90,000 workers directly, and is tightly entwined with industries that employ thousands more. Some analysts say that, including subsidiary industries, the Big Three employ roughly 3 million Americans. When other big companies restructured under bankruptcy, they have been forced to implement serious layoffs.

For example, when GM’s chief axle and brake supplier, Dana Holding Corp., filed for Chapter 11 protection in 2006 with assets of $7.9 billion, it ultimately fired 20 percent, or 9,000, of its 44,000 workers and closed eight plants.

Dana instituted a two-tier union contract, in which newer hires receive substantially fewer benefits than their predecessors. Pay is also tiered: longtime workers make $20 an hour; new workers $14.

Bankruptcy is also not a quick process. Dana finally emerged from bankruptcy in February, after two years under Chapter 11 protection.

Bankruptcy supporters say that the idea of government help doesn’t need to be left at the courthouse door. With liquidity drying up and credit markets tight, it would be difficult for the automakers to get the loans from the private sector that they would need to restructure. The government could be their lender.

“This sort of direct government intervention we haven’t seen since the Great Depression,” said Pottow. “It’s a brave new world.”

Critics of the bankruptcy option say that downsizing a GM on paper doesn’t easily translate into real life for an industry that props up a network of suppliers and car dealers. Cole of the Center for Automotive Research said the effects of a bankruptcy restructuring would be devastating for businesses already on the brink of collapse. Four of the country’s biggest auto-parts makers have filed for bankruptcy in the last five years alone. Significant cuts in their contracts could push them into insolvency as well.

“This is one of the differences between the theorists and the people who understand the industry,” Cole said.

In the meantime, GM is attempting to cut costs. The company announced Friday that it will temporarily shutter 20 North American factories. It plans to produce 250,000 fewer vehicles in the first quarter of 2009 compared to the same time last year.

For the automakers, the bankruptcy process, though complicated, could buy some time. If GM files this month, for example, it could keep operating until President-elect Barack Obama is sworn into office Jan. 20. Obama has repeatedly supported a bailout for the industry.

“If they file for bankruptcy,” Lawless said. “bankruptcy doesn’t give them a good business model. It gives them a breathing spell to try to get the company back into financial health.”

GM would need to pay for its daily operations, but pre-existing creditors would be put at bay, allowing the company to sit tight until a government bailout — or a perhaps a new business plan — comes their way.

(Laura McGann is Managing Editor for Michigan Messenger’s sister site, The Washington Independent.)