Even With Huge Cost Cuts GM (GM) May Need Government-Supported Chapter 11

November 25, 2008 by Douglas A. McIntyre

Batmobile512After months of hunting, there still may be no single solution to the market and economic problems that are driving GM (GM) out of business.

Any steps will have to bring together creditors, suppliers, the UAW, management, and probably the US government.

According to Bloomberg, “General Motors Corp., seeking U.S. aid to survive, must significantly cut debt and labor costs and may still need a government-backed bankruptcy to remain viable, Merrill Lynch & Co. and JPMorgan Chase & Co. analysts said.”

Why? For starters only a few of GM’s suppliers, some of which have been owed money for six months, could go into court and attempt to force the big auto company into a liquidation in the hopes of getting a portion of their money.

If GM wants to sharply cut costs, it will have to eliminate more of its UAW workers and perhaps cut funding to the VEBA which was set up to supply benefits to current and retired blue collar employees. The UAW could strike to stake a claim to its piece of a restructuring. GM and its suppliers cannot afford for the car company to be shut down.

GM also has to face concerns by customers that their warranties will not be honored in a bankruptcy. Some third party, probably the federal government, will have to set up an agency to make certain capital is available to cover “five years or 50,000 miles”.

It is virtually certain that GM’s common shareholders will lose all of their capital. There are levels upon levels of preferred stock and bond holders. It could potentially take months to work through the maze of debt used to finance GM over the last several years.

In other words, a bankruptcy court will need legions of accountants and attorneys to sort the mess out. And time, which is something GM does not have.

Douglas A. McIntyre