Bankruptcy, Bankruptcy Everywhere

Tue, 31 Mar 2009 17:27:54 +0000

There were two interesting pieces in The New York Times today about bankruptcy proceedings. It was nice to see this sound advice via Andrew Ross Sorkin's Dealbook:

“If I’m a bondholder, the best forum for me is in front of a judge,” said Daniel Alpert, a founding managing director of Westwood Capital, an investment bank. “Let’s face it: the biggest problem at G.M. is still its cost basis, and that’s chiefly labor,” he added, suggesting a judge would look at the situation dispassionately.

So far, bondholders have been offered 8 cents on the dollar in cash, 16 cents on the dollar in new, unsecured debt, and a 90 percent stake in G.M. G.M.’s bonds closed Monday at 16 cents on the dollar. Hoping to apply some public pressure to the bondholders, Senator Carl Levin, Democrat of Michigan, said Monday that if G.M.’s bondholders “refuse to work out a deal, they will likely end up empty-handed.” (That is not exactly true.)

Given the meddling by the other two branches of government and the huge amount of deferred compensation on GM's books, that's probably true here.

The other reference to bankruptcy is in this piece by Mary Williams Walsh, largely about municipal bankruptcies like the one going on in Vallejo, California. Here's the part about GM that jumped out:

Now, though, officials in the Obama administration may be looking ahead to a rescue of the automakers, an enormous challenge that could be simplified, from the government’s point of view, if kept out of court and under tight administration control. That would make it easier to change the terms of contracts governing retiree benefits, said David L. Gregory, a law professor at St. John's University in New York.

“The issue is, how can the government calibrate and contour and control the process of reorganization,” without the time, expense and compromise inherent in bankruptcy, Mr. Gregory said. “The executive branch is proposing to do what the bankruptcy courts have had the exclusive prerogative to do.”

These are dangerous precedents to set. Time may go down. Compromise will definitely go down, but only because expenses are going way up. There may be lower fees to attorneys, but there will be much bigger cash infusions from taxpayers. Bailout in lieu of bankruptcy substitutes taxpayer expenses for stakeholder compromises. That's a bad deal for the taxpayer.