Out of Control Policy Blog

White House Considering GM Bankruptcy

The New York Times is reporting that the government is prepping GM for bankruptcy:

The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite G.M.'s public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend...

The preparations are aimed at assuring a G.M. bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in G.M. and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders.

Part of the complication in this whole deal is that GM's creditors know they can hold out for a better deal since GM has government backing. That wasn't the case with Ford, who has--on their own--negotiated a settlement with investors. Once Washington dollars get in the picture it gets messier. 

There is also a dual political issue here. The biggest one is labor. President Obama, and Democrats in general, have long been the beneficiaries of labor support, both in dollars and votes. GM is struggling to strike a deal with the UAW in terms of compensation and long-term obligations (like pensions) concessions. Ford was able to strike a deal with the UAW, so we know they are willing to bargain. But with a political party in power that has received strong backing from unions like the UAW, there are political cards and capital at play. The President has to be careful with alienating the unions in negotiating a GM deal.

Furthermore, if the White House leads GM into bankruptcy leading to large layoffs, that will look bad for an administration that is all about "protecting jobs". This reality is threatening (if not definitely) skewing the terms of negotiation.

Politics at play in this bankruptcy issue is complicating the whole mess. But really, the only thing that should be in the middle of this is what is best for the company to survive in the future. If that means hard decisions like job cuts, then do it. If that means bankruptcy and letting a judge determine a settlement for creditors, do it. If that means splitting up the company in bankruptcy, do it. But all of that has to come from a non-partisan, non-politically engaged mediator. The White House is essentially taking GM through a bankruptcy proceeding anyway, except on a different level. And it just can't be properly this way.

My colleague Shikha Dalmia on GM bankruptcy here. More from Reason on GM restructuring here and here. More on Ford's more successful approach here

Anthony Randazzo is Director of Economic Research


« Another Cut at Federalism | Main | Has U.S. Demand for Oil… »




Out of Control Policy Archives