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Where Should GM File for Bankruptcy?--Skeel

The most surprising development in the Big 3's campaign for a bailout has been the amount of resistence it's met. Surprising to me, at least. After all the money that's been committed to the financial bailout, I assumed the carmakers would get a sympathetic welcome in Washington. It's encouraging, in my view, that this hasn't happened. The best case for a bailout is a situation where the company simply has a cash flow problem and will be fine if it is given temporary funding. GM's problem isn't cash flow; it's solvency- too much debt and not enough asset value. That's precisely the kind of problem chapter 11 is designed to address.

One of the most intriguing questions is where GM will file for bankruptcy if that's where it ends up. Large companies generally have a variety of filing options. In recent years, most have filed in New York or Delaware, because these are the bankruptcy courts with the most sophisticated judges- judges who handle a lot of big cases. I suspect GM wouldn't follow this pattern. Both the CEO, Rick Wagoner, and the employees may think they'll get a judge more sympathetic to their plight in Detroit. If they file in New York or Delaware, on the other hand, they'll seem to be turning their fortunes over to Wall Street (New York) or corporate America (Delaware). Assuming the bailout falls through, look for Wagoner to portray himself as a champion of employees' interests, and to file the case in Detroit.


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Comments ( 5 )

Okay, great post--and I agree--and now I'm going to rant:

I read your post after having read today's unflattering New York Times story on GM C.E.O. Rick Wagoner (http://www.nytimes.com/2008/11/18/business/economy/18auto.html). After reading the Times story, I had to wonder: so is this about saving Wagoner's butt? If he's seriously concerned about the future of GM, why is he seem to be holding on so tenaciously to his position?

And then I read your blog post, which I found disheartening: is there nothing to stop G.M. from filing for Chapter 11 in Detroit? Is it that easy to shop around for judges (sort of like Wall Street investment banks shopping around for bond rating firms)?

Nor is labor without some of the blame here. I sense that all over Detroit folks are suffering from a pretty serious case of affluenza.

Richard, on the question of where a company can file, the bankruptcy laws allow the company to choose any district where the company is incorporated, has its principal place of business, or has its main assets; or any district where a subsidiary has filed for bankruptcy. GM is incorporated in Delaware and its principal place of business and assets are in Detroit and vicinity, which would make Delaware and one or more districts in Michigan, including Detroit, options. If GM has subsidiaries in other places (such as New York), as they no doubt do, this would create other options. Bottom line is there's really no way to stop the company from picking Detroit as its filing location.

I couldn't agree more with your comments. The Wall Street Journal (http://online.wsj.com/article/SB122703811621838291.html) today reports that GM is asking for $10 billion of the proposed $25 billion allocation from the TARPs fund. GM further claims that without this money it may not be able to make it through the end of the year, a mere 6 weeks away. Given that GM is presently burning through cash at the rate of $2 billion per month, that $10 billion would therefore only buy them 5 months of operations. Even if they were able to cut their costs by 25% overnight (as unlikely as that would appear), that would still only mean sufficient capital to operate for perhaps 7 months instead. Given the unlikeliness of their ability to implement drastic cuts to their expense structure in that time frame (absent the help of a bankruptcy petition, which would obviate the need for the government assistance to begin with) combined with the seeming unlikeliness of significant improvements in the market for new vehicles in the United States over that same period, it seems phenomenally likely that GM will find themselves back where they started by late spring of next year. If that happens, the Treasury will find itself either once again with GM waiting in queue for the dole, or else in the awkward position of an unsecured creditor in bankruptcy when GM admits the inevitable and files its Chapter 11 petition.

In other words, as Kenny Wayne Shepherd says in Blue on Black:

Blue on black
Tears on a river
Push on a shove
It dont mean much
Joker on jack
Match on a fire
Cold on ice
A dead mans touch
Whisper on a scream
Doesnt change a thing
Dont bring you back
Blue on black

Most likely the case will be heard in Detroit. Whereas they are looking for smypathy, one can only hope it is the facts of the case, and not the emotion of it, that is tried. My biggest astonishment is that the government is working to try to assist the auto companies, when the airlines were left to falter.

Where is the justice in the GM Bonds? I mean who is responsible for me losing a huge chunk of our family nestegg? I bought "on good faith" rated GM Bonds BBB+. Did the ratings companys err? Or were they paid off to list them higher than they were worth? I really did not want to buy them at a mere 7.125% interest rate and have to go out to 2013. But...leukemia came my way, and I had to find "a safe place' to park that nestegg for my spouse. Turns out now that likely she will have little or nothing to make ends meet. I really am upset with this (what I thought was an ultra-conservative) investment to protect my wife. Since I won't be around to see the ending to this story, it certainly will not affect me personally, as I will be somewhere other than the planet earth....but someome, some company, lied throught their teeth about these bonds and should be punished...I mean they had the fidicuiary DUTY to do the right thing and obviously, I think purposely misled investors. Is this just going to wind up as as yet another miscarriage of justice? This is just outright sickening "greed' at it's worst!