Thursday, May 28, 2009

U.S. taxpayers soon may be General Motors' new owners | McClatchy

New report from McClatchy has the government owning the majority of GM.   I speculated about this yesterday, and was not surprised that the reports today was that I my unsupported theory was wrong and the company was going to remain privately owned.  Now, it seems, the reports are  mixed.  I am skeptical of both reports, and would probably believe that neither report is accurate.  Moreover, I believe that the government is probably keeping its options open.  I really wish that there was some high powered Bankruptcy talent in the Obama administration, but wall street generally doesn't like to mingle with skid row; even in the corporate side which they consider vulture capitalists--like venture capitalist are Eagles are something.  I will keep an eye on this story, and will update it as news comes in.

U.S. taxpayers soon may be General Motors' new owners | McClatchy

I was right! I was right! Anyone listening?

Not to say I told you so, but I told you so. Bondholders are in line, but Bankruptcy is still immiment, or innevitable, or something that is going to happen like really, really soon. As I said yesterday, the whole showdown was a facade, and whether the bondholders were on board was irrelevent to the necessity of filing.

The new plan seems a bit different than what I opined yesterday, as it seems to be a basic "boot strap" reorganization, where the "bad assets" are shed, while the good assets are reorganized in some form of ongoing entity. Oh, and it looks like all the government aid, some 20 billion or so, is going to be forgiven--I hope I get a Holiday Card for my share.

This is a fairly lame solution to a complex issue, and that it doesn't force technology evolution in a way that would revolutionize the car industry. It is ultimately a buy time resolution, where what is really wrong with the car companies will be dealt with later. That being said, as I said yesterday, 3 million jobs is a whole lot of jobs, and now might not have been time for a bold solution.

Wednesday, May 27, 2009

Latest Automaker Bond Dance merely a Charade.

It is final, it has happened, and no one is going to stop them now. GM will be filing bankruptcy; by June 1, or sooner. Than again, maybe later, but who really knows. The imminent filing which has been reported on almost a daily basis for the past month. They ran out of adjectives about 10 days ago when imminent didn't seem appropriate anymore. Journalists may no longer be intersted in the truth, but they are at least good with grammar, and "now" wasn't appropriate in the past tense. The reality is the last month of negotiations have been nothing more than a foolish game, one where the only possible solution was some form of bankruptcy filing.

See, even if the government was able to negotiate a deal with the bondholders, which was almost an impossibility given that many of their positions are insured--thus making a negotiated solution less preferable than a total loss-they would still have to deal with the legal liability of all dealers they intend to close. To many of the owners, their dealership is their sole source of living. When it gets unceremoniously yanked, it is not like they won't sue. Bankruptcy was and is the only solution to these contingent liabilities.

As I have said before, bankruptcy is not a bad option for these companies. It is important to restructure the bloated distribution infrastructure. However, bankruptcy won't do anything to modernize the propulsion technology. Remember, and I can't say this enough, cars have the same propulsion system today they had 100 years ago. Why? Is it because we don't have new propulsion system's that would work in cars? No, the electric engine has been available for over 25 years! Because, the new propulsion system's are as efficient? No, we all know hybrids are way more efficient! The main reason, and there are others, is because the massive infrastructure in place is built to make the internal combustion engine. Remember the Brady Bunch episode when Peter Brady was recruited to be Johnny Bravo because the suit fit, that is our auto industry. We continue to build internal combustion engines because that is what we are set up to build--the suit fits. 3 million American jobs rely on the status quo, and in the midst of this current recession, we can't afford to send them on there merry way to find new employment.

While I don't take the needs of the 3 million workers lightly, retaining the current infrastructure, and by design creating ongoing disincentives to develop new propulsion technology, comes at a cost. Imagine what would happen if that infrastructure collapsed, and incentives to develop new technology existed. I am just guessing, but the hybrid engine would look prehistoric in 2 years. Let's remember folks, this is America. We developed the car, we can take it to the next generation. That being said, we won't get there with financial, economic and government incentives against it.

I have a theory. There have been rumors that GM will sell off some of its assets to the government after the Chapter 11 filing. Why would they do this? Well maybe they intend to temporarily nationalize the company through the modernization of new propulsion technology. After a period of nationalizaion, the modernized automobile infrastructure which it could then privatize. This would maintain some form of status quo, avoid a total collapse of the car industry(and the 3 million jobs reliant on them), and put America on the forefront of next generation of vehicles.

I like this idea. It is bold, and need I say audacious. However, I don't think it will happen for a few reasons.

1. President Obama is a capitalist. I don't care with Limbaugh and Beck say, while a liberal, the President is a dyed in the wool capitalist. This move is a bold energetic move of socialism.

2. Similarly, the government doesn't have the economic resources to run a car company. Republicans will say that once that infrastructure is developed, it will be hard to dismantle (by the way, not a bad argument). That being said, there will be a lot of out of work car executives. Moreover, our country has such a capitalist value, I don't see a brief experiment in surgical socialism will be something impossible to undo.

3. In addition, the move is way to bold and dramatic for this President. I like Obama, supported Obama, and trust his judgment, but bold moves are not in his playbook. Obama is quite possibly the most temperamentally conservative president our country has ever seen. Nationalizing the car industry to promote ingenuity and innovation may be to wild of an idea for him.

4. Finally, it is expensive. It may be cheaper to simply prop up the existing infrastructure and hope that technology evolves slowly over time.

Only time will tell whether the current strategy for working out the issues in the car industry will be successful. History really does not give us much to work off of. We have never had an industry which was so important to our economy(or any economy for that matter) in such dire financial condition. For us to prosper from the solution, however, we need bold action, and for our private and public sectors to engage meeningfully in the solution.

Friday, May 15, 2009

Mortgage Cram Down Legislation-Rejection of something that really would have helped consumers.

This blog is primarily devoted to bankruptcy issues as they face business; however, the rejection of the mortgage cram down legislation is something that bothers me--both as a bankruptcy lawyer and someone who is politically aware. The reality is that businesses have the right to strip liens on their assets in a Chapter 11. Why shouldn't consumers be able to do the same thing. Moreover, as a practical matter, this legislation would have a positive impact on banks, as it would keep more consumers in their homes. Think of it, unless there are some unique circumstances, people are not going to keep their homes unless it is worth more than the amount of their mortgage. The legislation would have only allowed a forced reduction of the mortgage to the exact value, so homeowners wouldn't be getting a windfall. But homeowners would have incentive to stay in their homes. This is the goal of a number of government programs, but they have, not surprisingly, not been properly managed. The banks have cried foul, as no doubt, some actuary has reported this will damage their profits, but these are the same actuaries who told them they were protected with credit default swaps. The 1978 Bankruptcy Codes stated goal was to "give the honest but unfortunate debtor a fresh start." No kidding, that was what the legislatures who wrote the bill stated. Humane, well written, and operating almost perfectly for 25 years, until the banks (the same banks that now need trillion of dollars of taxpayer dollars) re-wrote the bill in 2005. Let's take back the dignity that bill provided. Mortgage cram down legislation is a great start! Get it done!

Automobile Bankruptcy(s)

Chrysler's bankruptcy filing has done nothing but continue to operate in a dysfunctional matter, continuing to put bad product on the market, into over saturated distribution system, and expecting different results. Politically and practically it may make sense, as it creates a soft landing for Detroit. However, my concern is that it is a battle without an exit plan. They are going to sell the good assets of Chrysler to Fiat, hoping that Fiat will continue to utilize it's suppliers, but then the word is that it will continue to operate in bankruptcy for years. This is an expensive way run a business. Good for lawyers, not good for anyone else. The reality is that what business continues to rely on the same technology it had almost 100 years ago. It would be like if computers still were using vacuum tubes to power computers. The reality is if the current infrastructure continues to be propped up, there will be no radical change in technology. A better solution would have been to national the industries through radical changes in technology. Before you call me a socialist, the government is already paying the executives and the expenses of the bankruptcy, and this would not be a substantial difference. It would allow for a cohesive strategy for rapid technological advancement.

Welcome to Commercial and Complex Bankruptcy

My first blog post, and it isn't quite set up yet. My assignment if I choose to accept it, is to opine, editorialize and otherwise provide valuable comments on commercial and complex bankruptcy issues.