GM and Chrysler. Let Them Go Bankrupt?

There are lots of pundits, theorists, academics and people on TV in suits that say: yes.

Having had a long career with a once successful company that went into Chapter 11 and ultimately Chapter 7, I can tell you why bankruptcy for the auto industry is a painful option.

1. Bankruptcy requires “debtor in possession ” financing. There was a time when there were investors looking for a big return who would readily finance bankrupt companies that had potential to return to profitability post BK. Those investors are gone. The lender of last resort is the U.S govenrment: (you and me).

2. Bankrupt companies do not have to pay their suppliers. If they owe money they end up paying pennies on the dollar. How many suppliers could withstand the reduction in revenue withjout themselves filing for BK? Probably none. Then the government (you and me) would once again have to step in to help the suppliers.

3. Bankruptcy allows companies to throw out  their labor agreements and impose new work rules, pay and benefits. Layoffs are a part of the equation. The laid off people now have no income except for unemployment benefits. And what about health care? Someone is going to pay for it (you and me).

4. Bankruptcy allows companies to terminate retirement plans and health care benefits. Defined benefit plans go to the Pension Benefit Guarantee Cooperation which is now overloaded. Defined contribution plans (like 401ks) plans may be terminated. Employees will be forced to cash out their plans in the worse market since the Great Depression.

5. Health care plans for those already retired will be terminated. Where will these retirees end up getting health care? From the government (you and me).

6. The unionized workers in the auto industry are going to take a major it regardless of the outcome. How many government workers will take a hit? How many politicians will take a hit?

The next time your hear someone say “let them go bankrupt” think about the consequences.


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