June 3, 2009
363 Sales in Bankrutpcy
The Chrysler bankruptcy and now the GM bankruptcy feature 363 sales. I have written briefly on this before, This deserves the careful attention of more than a few blog entries. Chapter 11 features, features, a well tested "plan approval" procedure. First, managers, and it that fails, then groups of investors, propose a "plan" for the reorganization of the bankrupt company. The plan compromises the claims of the lower tranches of debt (usually turning debt into equity and giving shareholders a token residual equity position for their shares) so that the company becomes solvent (the operating profit now can pay the remaining debt obligations on time). The bankruptcy judge must be convinced the plan is viable (or he will send the company into Chapter 7, a liquidation) and divides the investors into classes. Those classes whose claims are "impaired" by the plain -- they are not receiving full payment on their obligations -- vote by class on the plan (the vote seeks two majorities, one by number of creditors voting and one by the amount of the claims being voted). Some secured creditors, with high priority, may not vote because they are not impaired. If enough classes vote in favor, the judge has the option of "cramming down" the plan on those classes that do not. If the plan "passes," the company emerges from Chapter 11. A 363 sale is an emergency sale of the company, proposed by management and approved by the judge, before any plan has been proposed, let alone passed. A 363 sale can be an end run around the entire Chapter 11 procedure. Once the company is sold, the Chapter 11 turns into an Chapter 7 -- the proceeds of the deal are the only thing left to do for the court. Over twenty years ago, the Circuit Courts recognized that a 363 sale was a method of avoiding Chapter 11 procedures and thus they restricted the process with a threshold -- the assets must be time sensitive (like vegetables in a railroad car). Here we see the government doing the same thing -- they are avoiding the Chapter 11 procedure, to avoid the claims of those pesky creditors that are not going along with the government's version of the a workout, by selling the companies first and quickly in 363 sales. The argument is that the companies must move quickly or lose all their customer. Yet last month was both companies best sales month in several months -- after the bankruptcies were either announced or known. These 363 sales are, in essence, total cram downs without a vote. The danger? Managers sell the company cheap to reward themselves and their go along creditor buddies (read, the UAW and the government as debt holder here). Bankruptcy judges, eager to avoid a year of hearings and decisions, and eager to "save" jobs of employees by keeping the company doors open, have a strong incentive to go alone. In these cases, first Fiat and now a Chinese company (and the government itself in buying the "new GM") are getting too sweet a deal in these 363 sales. In the government's case, the sweet deal is an avoidance of the difficult question of whether the "new GM" will survive - whether it should be thrown into a Chapter 7. Taxpayers and unsecured, non-union creditors are taking the hit. The bankruptcies should go through the full plan process. Old time test procedures work -- new emergency reasons to avoid them are -- well, trouble in river city.
June 1, 2009
GM Numbers: New Plan Does Not Make Economic Sense
GM has $90 B in assets and $170 B in debts. The government plans to put in another $30 B, for loans. the new company will be a shell of its former self, employing 40 to 50 thousand or so workers once all the plants are closed. GM has 225,000 workers worldwide and, until today, 90,000 here. Why spent so much on a shell of a company with a very questionable future? Given even optimistic estimates for selling new cars, GM is likely not to show a profit for many, many years. It is likely to go into bankruptcy again, soon. This is a major government investment for 40 to 50 thousand jobs (less than half the seats in Ohio State Stadium).
Morevoer, under the new plan, much of the overhanding debt is cancelled in exchange for equity in the new company. Yet the amount of equity doled out to the various debt holders is very suspicious. The standard is equality -- all unsecured debtholders with cancelled debt get an equal amounts of equity relative to the debt cancelled. This equality standard has been, as many commentators have noted, trashed. Workers unsecured claims get four times the value of the unsecured claims of all other creditors. Taxpayers as current debtors get less, ceding much of the value ot their equity claims to the UAW. In essence, taxpayer and bondholder money has been shuffled into the UAW.
The new structure establishes severe conflicts of interest. To whom does the CEO report? The government? Canada? The UAW? The government has a conflict -- it is both regulator and owner. As a regulator it reports to environmental constituencies, labor unions, and others. Taxpayers lose in this. The UAW, on the other hand, supports American -only jobs (members pay dues). The union does not care for GM cars imported from abroad (where some of its best small cars are manufactured); it will willingly ssacrifice GM profit for job guarantees. In sum, this is a political payoff from a new Democratic government to one of its longest and most faithful supporters, the UAW. The government is saving jobs that should not be saved to save a union. The government will be protectionist (selling Opel on the condition that Opel not import into the United States, for example) and will subsidize the jobs to subsidize the union.
A Chapter 11 reorganization, many months ago, without government interference and money, was the best route, but government interference cost GM the opportunity for a normal restructuring. The past iinvolvement of the government, sacrificing the opportunity for a Chapter 11, now means the best decision going forward is a Chapter 7, liquidation. Sell the $90 B in assets and divide the cash among the debtors.
The history of government bailouts of auto companies worldwide is abysmal. Why can we do better? This goverment controlled Chapter 11 is either a very, very reckless path born of hubris or a calculated political payoff with long-term economic costs. You pick.
Setting Up a Scapegoat for GM
The NYTs today is gushing over a 31 year old who interrupted law school to "run" General Motors in the bankruptcy announced today. He has no formal economic training and no business training. His dad is a "green" engineer. He is a scapegoat. Obama's high ranking economic advisors haveset this kid up to take the fall of an inevitable failure of a government effort to run an automotive company. They are not going to be front and center on this. They know that it is highly likely that GM will emerge from bankruptcy a mess. It's future will pprobably be a second bankruptcy (similar to many of the struggling airline companies).
Yesterday I took my son to a barber and we tested Buffett's advice: "Never ask a barber whether you need a haircut." We asked the barber: "What to you tell people who ask you whether they need a haircut?" He responded: "I always say yes, of course." Obama has the same problem with his "experts." When you ask and "expert" for advice th modern expert, educated at Harvard or Yale always will tell you they can fix the problem; they never say "I don't know" or " We should stay out." Obama and his experts think they can run a car company, reluctantly, of course, but they have "no choice, but to fix the problem." Where is the humility? Not taught in school by experts; not held by experts.