The Chrysler Bankruptcy: Don't Let it Happen to GM

Of the two members of the Big Three automakers receiving government life support, Chrysler was the weakest and therefore most widely prophesied to enter bankruptcy. Nonetheless the fulfillment of that prophesy with the "surgical" Chapter 11 Bankruptcy announced today is unfortunate. Occasioned by the refusal of some hedge funds holding Chrysler's debt to make a deal, hedge funds that the President did not hesitate to call out in his midday remarks, the bankruptcy opens a new chapter in the auto bailout. If all goes as expected, the company will emerge with a deal similar to that turned down by the bondholders which creates a new Chrysler allied with Fiat free of a large amount of debt and wage and pension obligations. The big question mark is whether the judge will ratify the prepackaged plan or whether the hedge funds can somehow use the bankrupty process to undo the deal.

While GM seems stronger than Chrysler, in some ways it is the more difficult case. There is no Fiat waiting in the wings to invest in GM. And becaue GM's bonds are far more widely held than Chrysler's, the bondholder committee that currently exists represents only about a third of debt outstanding and thus may have even greater difficulty striking a deal that all the bondholders support. A GM bankruptcy would be far more complex than one for Chrysler because of the size and scope of GM's operations.

As I mentioned in a previous post, two processes should commence immediately to make the most of a difficult situation.

First, the Administration should begin aggressively negotiating with bondholders in order to have the best chance of striking a deal. Secondly, rather than just scuttle business lines such as Pontiac and Saturn--what GM has proposed, GM should actively try to transfer these highly perishable, yet potentially valuable assets to others. Unwanted GM plants and dealer networks, invigorated with new capital, could easily become the nucleus of a new, high growth American electric car industry. But that will only happen if GM and the Auto Task force work quickly to convert challenge to opportunity.