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Auto bankruptcy: Just Say No

This morning, Brookings Institute economist Robert W. Crandall was on Bloomberg Radio flogging the idea of a prepackaged bankruptcy for Detroit’s carmakers. It’s the best solution, he argued, because the car companies could negotiate cuts with their lenders, unions, suppliers and dealers before going to court and then the judge will quickly pound his gavel and all will be well. About 450,000 retirees and workers will accept smaller healthcare benefits and pensions, GM can kill brands without buying off dealers and rewrite the union contract. The government will provide the debtor-in-possession financing to keep, say, General Motors afloat while the courts work it all out. It’s done. It’s a snap.

If only it were so simple. It’s not. Actually, it’s a terrible idea. One survey says four in five consumers won’t buy a car from a bankrupt company. That’s why GM says its sales would drop even faster than they are now while it’s in bankruptcy court. Plus, the bargain hunters who might buy a GM car would want a discount, right? If GM is right and their sales drop by 2.5 million vehicles and rebates climb another $4,000 a car, the company would need another $11 billion in addition to the $12 billion they already say they need. That’s $23 billion in DIP financing that the government has to come up with. And that’s just for GM.

I know what the skeptics are thinking. The notion that consumers will shun the cars of a bankrupt carmaker is unproven. True. But what those bleating for a GM bankruptcy are calling for is the government to lend—instead of $12 billion to $18 billion—maybe $23 billion to $29 billion. And they are willing to do it without knowing if buyers will come back to GM brands after the public beating that the company will take in the press for ending up in bankruptcy. GM can’t prove buyers won’t be there. But the bankruptcy hawks can’t prove they will. Since they have no skin the game, they don’t care either. What I mean is, they’re willing to risk bankruptcy on a hunch, but not a bridge loan.

Mr. Crandall and the proponents of bankruptcy must come from the Wall Street firms and banks that are in trouble right now. Remember, they got into this mess by racking up more debt and using that cash to make riskier loans and investments. That’s the same principle as bankrupting GM. The government-sponsored prepackaged bankruptcy says that we will possibly loan out more taxpayer dollars than the companies want in a bridge loan. And we will give it to a company that might lose customers, and hence revenue, in droves. GM’s biggest problem is retaining customers. Bankruptcy makes that harder, or at the least risks doing so. Talk about putting tax dollars at risk.

So we want a plan that gambles taxpayer money that shoppers lied in the survey and will keep buying GM cars after all. Is that right? Yeah, that will work. And when it doesn’t and the manufacturing sector of the U.S. economic takes a massive blow, we can then rely on the brilliance and strength of the financial sector to make up for the loss of jobs and value creation. How’s that working out for us right now?

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