The Long Crisis

Bloomberg has just reported that President Barack Obama has determined that a prepackaged bankruptcy is the best way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

While Obama two days ago gave GM 60 days to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in a viability plan submitted last month, the “quick and surgical” bankruptcy his administration described as an option appears to be inevitable, according to Bloomberg’s sources.

“Our focus is on accelerating the speed of our operational restructuring and reducing liabilities and debt on the balance sheet,” GM spokeswoman Renee Rashid-Merem said in an e-mail. “GM will take whatever steps are necessary to successfully restructure our company.” However, it now looks like the exact way that GM restructures will be up to the Obama administration.

Of course, “operational restructuring” are really code words for plant closings and the elimination of expensive union auto workers from the GM payroll. In a bankruptcy many of the benefits of remaining auto workers as well as retirees and newly “redundant” workers will be eliminated or reduced.

The GM bondholders will also take a king sized haircut. The bondholders may have made a big mistake by playing hardball for so long. They refused to take substantial reductions in the principal amounts of the billions in dollars of the bonds they hold in their portfolios. Now they will be lucky to realize 20 to 30 cents on the dollar, maybe less.

This bondholder’s haircut will effect many of the nations largest financial institutions, such as insurance companies, college endowment funds, mutual funds, and pension funds, who thought that AAA rated bonds from a bell weather blue chip corporation like GM were prudent investments. The world of finance has been turned upside down by this deflationary implosion and the real carnage is still in front of us as each disaster sets off others. Losses in some of the portfolios will be in the billions of dollars.

The bankruptcy of GM is serious business. Not only will many thousands of autoworkers lose their jobs but the suppliers to GM will be severely effected and many of their employees will lose their jobs. In addition, businesses , large and small, in the communities near GM plants will be devastated.

Obama is making a tough love decision. However, when you look at the GM financial statements you will see even if you are not an accountant that there really is no hope for a workout at GM. A structured bankruptcy will lead to a lot of pain for a lot of people and further accelerate the decline of the economy. But it may lead to a vastly downsized GM that in time can manufacture fuel efficient automobiles that people may actually want to buy.

We as a nation are nowhere near the end of this long crisis. A GM bankruptcy may finally get that message across to all of the talking head cheerleaders.

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