Forbes.com

GM Should Run To Bankruptcy Court

By avoiding bankruptcy, GM only risks trading union demands for federal tyranny

After the developments of this week, if there is any intelligent life left at General Motors, it should run--not walk--to bankruptcy court. That may be the company's only chance to free itself from the triple-vise of unions, creditors and now President Barack Obama--who is by no means the least life-threatening of the lot.

In his short tenure in office so far, the president has amassed a pretty impressive record of saying one thing and doing the exact opposite:

* He forbade earmarks in the same breath that he signed a $410 billion spending bill with roughly 8,500 earmarks costing about $ 8 billion.

* He declared that America must reject the policies of "borrow and spend of the past" and simultaneously proposed a budget that in a single year authorized more debt than Ronald Reagan did during his entire presidency.

* He rejected "nation building" in Afghanistan, while at the same time launching a massive reconstruction effort that involves flying 4,000 U.S. troops to assist in training the Afghan army and police.

So it was utterly in character for Obama this week to both fire General Motors CEO Rick Wagoner and proclaim that "the United States has no interest or intention of running GM" in the same speech.

This is not to suggest that Wagoner's firing was a bad thing. It wasn't. In fact, Wagoner's departure was long overdue.

For eight long years, Wagoner was the rudderless captain of a sinking Titanic who managed to mask how badly adrift he was only because Detroit's other two automakers were sinking with him. But that fiction became harder to maintain after Ford Motor CEO Allan Mullally came on board two years ago and began charting a radically different course that, so far at least, has kept the Blue Oval out of deep waters. Indeed, with the exception of Saturn, Wagoner has not been able to bring himself to jettison any one of GM's eight brands--even though the company has leaked $70 billion in red ink over the last two years.

By contrast, Mullaly, in an impressive flash of foresight, especially for an auto neophyte who came to Ford from Boeing, mortgaged his entire company--including the Blue Oval itself--before the credit meltdown to build $25 billion in reserves, hence avoiding the need to rattle his tin cup before Uncle Sam. (That's the beauty of the market: Over time, it generates new ways of measuring success and failure.)

But just because there is no reason to mourn Wagoner's departure, that doesn't mean there is any reason to celebrate what Sen. Bob Corker, R-Tenn., correctly calls an unprecedented peace-time power grab of private industry by Uncle Sam. "This is a marked departure from the past, truly breathtaking, and should send a chill through all Americans who believe in free enterprise," Corker noted.

The only way GM can now escape from Obama's thumb--and actually return to profitability someday--is by filing for bankruptcy, not cutting a deal with unions and bondholders out of court.

The Obama administration has promised GM an unspecified amount of "operational capital" on top of the $14 billion it has already received to hammer out such a deal within the next 60 days. If it fails to do so, the administration is threatening to push it into bankruptcy. (Chrysler has been promised up to $6 billion to finalize a deal with Fiat that it was already close to finalizing.)

But GM should demur and file for bankruptcy now.

For starters, waiting 60 days will mean it will be about $8 billion or so more in the hole given that it costs about $ 3 to $4 billion to keep it afloat for a month. Borrowing more money is not a smart move for a company whose debt--not counting its pension obligations--is already more than 24 times its market capitalization. But it's an especially bad idea to get in deeper with the government. Why? Because if GM ends up in bankruptcy anyway, the court will be able to write off its debt to unions and creditors. But Uncle Sam will take its pound of flesh. This means that GM will have less on its back to start anew once it emerges from bankruptcy.

But GM has to fear the government even if it doesn't go into bankruptcy. In that case, the oversight for its restructuring plan will be supervised not by a court but by the Obama auto task force. And the odds that the task force will be guided solely by GM's bottom-line interests rather than Obama's political agenda are about the same as pigs flying.

Indeed, Obama has already declared that he wants to make GM the world's leader in "building the next generation of clean cars." Never mind that GM can neither build these cars well nor sell them. Out of GM's top 20 "profit-contributors" last year, only nine were cars--the rest were all politically incorrect SUVs and trucks. GM sold less than 15,000 hybrids last year, and this year is going to be worse because industry-wide hybrid sales have dropped by two-thirds from their peak last year. Indeed, last year there was a waiting line for a Toyota Prius--today there is an 80-day supply sitting on dealer lots. Meanwhile, the Obama task force was forced to conclude that the crown jewel of GM's green lineup, the $40,000 electric Chevy Volt it developed expressly to impress D.C. Democrats, is "too expensive to be commercially successful."

Yet nothing that Obama has said gives any hope that he will accept such market realities. To the contrary, he has given every indication that he will use GM as a pawn to launch the biggest auto industrial policy ever. By avoiding bankruptcy, GM only risks trading union demands for federal tyranny. It is not a smart trade.

Shikha Dalmia is a senior analyst at Reason Foundation. This column first appeared at Forbes.com.

Shikha Dalmia is Senior Analyst





;