Sunday, November 16, 2008

Big 3 again: Bankruptcy or bailout?

On Friday I mentioned that I was for allowing GM (and the Big 3 if necessary) to go bankrupt, provided it goes through a Chapter 11 bankruptcy (company still operating while restructuring) and not Chapter 7 (full liquidation). Several experts seems to think that GM would have to go Chapter 7 because of the impossibility of securing credit, but I did not understand why it was not possible for the government to secure its credit somehow to ensure it goes Chapter 11.

Today, Paul Krugman linked to a piece by Jonathan Cohn which said bankruptcy would be disastrous because of the aforementioned reason without exploring the possibility that the government could ensure that it goes Chapter 11; and said the bailout was the only solution and that the Big 3 had definitely learned from their mistakes anyway. It just seemed that my point was too stupid to even mention, as I did not read anyone consider that it could be a viable alternative.

But Felix Salmon came to my rescue:
At heart, this argument is simple. There's no available DIP financing for an orderly Chapter 11 bankruptcy, and Chapter 7 liquidation would be disastrous, therefore we need a bailout which avoids any kind of bankruptcy at all. But I don't see why a government bailout must, ipso facto, avoid any kind of bankruptcy.
He makes some good argument on the timing problem:
So there would need to be serious negotiations between all of GM's stakeholders and the government -- negotiations which, I'll concede, would be all but impossible during this uncomfortable interregnum between the election and the inauguration. Even if GM can somehow muddle through until January, it can hardly expect such negotiations to be concluded in a matter of weeks.
But this is hardly an insurmountable difficulty, it is just slightly more tricky than a bailout where legislators simply give free money in the hope that the company will use it wisely and that it learned its lesson this time. But it is also the best hope of successful reorganizing for American automakers.

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