GM Bankruptcy-Good for the Economy, but Bad for Management?

An interesting opinion piece in the Wall Street Journal, penned by Harvard Law School professor Mark J. Roe, argues that putting GM into Chapter 11 bankruptcy may not be as scary as GM management might want you to think:

General Motors Corp. is back in Washington, this time asking for $12 billion to add to the $18 billion loan the government approved last year. The possibility of bankruptcy for GM is very real — the company posted a loss of $30 billion in fiscal 2008.

GM continues to argue that it couldn’t survive a Chapter 11 proceeding, but the truth is that bankruptcy could boost its ability to survive. As the Obama administration considers its response to GM’s request for more cash, it should be mindful of the advantages of bankruptcy that haven’t been highlighted — certainly not by GM’s management.

As GM management argues its case for more capital, it warns of the dangers of Chapter 11 bankruptcy for not only itself, but also hundreds of vendors and suppliers.

Courts know that bankrupt companies need to keep getting supplies, inventory and parts for manufacturing to be viable. Hence, the bankruptcy code and the bankruptcy courts put payments for new supplies at the top of the queue, even ahead of most old lenders. Send in fresh supplies, and the courts have the bankrupt company pay for them, even while prebankruptcy creditors cool their heels.

Roe argues bankruptcy courts understand that and consider suppliers in restructuring.

There are other reasons why a Chapter 11 resolution may be the best solution for GM. Bankruptcy may be the only way for GM to fully confront its operational problems, deal with its legacy costs, reconfigure its dealer network, and achieve a viable labor agreement.

Roe also argues that Chapter 11 may help GM more efficiently use your taxpayer capital by dramatically creating the needed change, versus incrementally negotiating and rearranging the deck chairs.

However, Roe thinks this is the real hesitation and resistance to bankruptcy:

But one issue that has not been discussed much is that bankruptcy usually leads to a sharp change in management. There are turnaround teams expert at restructuring troubled companies, and they may well be more effective than GM’s current management. It’s no surprise GM’s management isn’t advertising this fact, but taxpayers and the government should know about it.

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