April 01, 2009
Heat and Light on GM
Posted by Fred Tung

WSJ dubbed it "one of the most dramatic government interventions in private industry since the economic crisis began," and one senator commented called it "truly breathtaking," a move that "should send a chill through all Americans who believe in free enterprise." The firing of Rick Wagoner as GM's CEO, along with current moves to replace most of the board, sure seems aggressive. But compared to what? 

The government is now a major creditor in GM, and creditors routinely use their leverage over distressed firms to replace management.  It might seem like the government has been a bit quick on the trigger, having become a GM creditor only a few months ago.  On the other hand, GM management has quite a long and public track record, so this new creditor didn't really need to spend a lot of time with first-hand observation.  Moreover, absent the government lifeline, it's quite conceivable that GM's private creditors would have pursued some version of this approach anyway, including forcing GM into bankruptcy, where managers are shorn of much of their operating and financing discretion, creditors often take control, and replacing management is pretty routine.  But as long as there was the possibility of bailout money in the offing, it made sense for all private parties to wait and see. 

Now, the administration is surely subject to the standard criticism that it hasn't the pure economic motives of private creditors in making decisions about GM management or its fate generally. Government decision makers are generally politically motivated and not profit seekers.  So they generally lack the incentives to get it right on the economics.  OTOH, GM's a pretty special case all around.  Certainly given the size and political importance of GM, the public scrutiny involved, and the multiplicity of political stakes, the administration has every incentive to get this one right.  "Right," of course, could come in many different forms, but at the very least, it would include preserving the best GM brands and operations as going concerns, and the related jobs--for GM, its suppliers, and its dealers.

One other important aspect of the management ouster is that bankruptcy is now a much greater possibility.  The fear of bankruptcy has been wildly overblown, especially the notion that suppliers will stop shipping.  Uh, this is not a new issue in bankruptcy, and as Mark Roe pointed out recently, the bankruptcy system has all sorts of prospective inducements to keep suppliers shipping.  

The real threat with a GM bankruptcy may be the unknowns for managers and unions.  As noted, managers lose some discretion in bankruptcy, as they have to seek court permission to use encumbered cash and to do anything out of the ordinary course.  Managers also commonly lose their jobs either during the case or immediately afterward.  As Rumsfeld might have said, this known unknown is now known.  New management is in place, and it is singing a different bankruptcy tune.

For unions there is risk as well.  Bankruptcy allows for the rewriting of burdensome contracts.  While there are some extra hurdles to the rewriting of collective bargaining agreements, the law leaves an enormous amount of discretion in the hands of the bankruptcy judge.  So who knows how that would come out?

Stay tuned.

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