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In our first installment, we introduced you to the current battle for the fate of General Motors. We highlighted why they share some if not all of the blame for their current situation.  We talked about the various sides involved in one way or another with the situation of GM.  Today we tackle the big question, what many deemed "unthinkable" previously, what bankruptcy would mean for General Motors and you.

Now many have called on for General Motors to declare bankruptcy.  Many of these folks believe that this filing would completely destroy the company.  While this may be a possibility, people tend to confuse between the type of bankruptcy that GM most likely would file and the one they may have in their mind.  

Corporations, in dire straights, tend to either file a Chapter 7 or Chapter 11 Bankruptcy.  The former is the complete liquidation of the going business concern.  The latter puts the company in receivership, that is it is allowed to continue operations but with the end goal of meeting the obligations to it's creditors.  The company is reorganized as asset sales are used to pay off debt, management is normally replaced, and shares in the company are usually made null and void.  OK, I grant you, this is actually an oversimplification, but these are the main pillars of Chapter 11 Bankruptcy.  Creditors, including corporate bond holders are first in line to try and get their money from the sale of assets or refinancing.  

Yet there are other ramifications as well.  If it is perceived that General Motors would attempt a Chapter 11, various actors within this business play would begin to move to secure their holdings.  These range from the UAW to the dealerships.  Now this could play out in stages, of course it's pure conjecture, but it is a good idea of how it could play out.

Stage 1: The Gathering Storm

Triggers

Certain triggers need to be hit in order for this financial tragedy to reach its climax. In bankruptcy, this is often failure to pay back a creditor.  Now General Motors currently has about $16 billion in cash, but has a burn rate of $6.9 billion/quarter.  According to industry insiders, one needs a minimum of $10-12 billion just to keep operations humming along at a low level.  Should the company see no return to profitability by the end of the first quarter next year, it will be at that minimal level.  

It's at this point that creditors begin to wonder who will get screwed first.  Also, around this point, or I should say by this point, the company will have begun scaling down operations.   Word on the Street will be that the firm will begin missing payments to it's suppliers and it's creditors.  This may or may not be true, but if history is any case with other past major corporate bankruptcies, these rumors will begin to fly. Indeed, it is this specter that has already seen one insurer who provides coverage to suppliers pull out of GM.

Eventually, perhaps by the second quarter, General Motors will begin to be late on their payments to their suppliers.  They may also issue a statement that bondholders will see a delay in their interest payments as well.  The price of their corporate bonds will sink to probably half of what they are going for now if not more.  Now assume as this is all going on, that Congress and the new Obama Administration are trying to put through a relief plan.  Yet, like the previous attempt, there was a hiccup.  There is a good possibility that the Republicans will use this as a wedge against the new Democratic Congress, and stall the bill anyway they can (the most affected states are "blue").  

In the interim, pressure builds on the management of the company as bond holders and creditors begin to demand assurances of some sort.  The stock by now is at or below a dollar.  Word is leaked that the company can no longer afford to insure it's debt.  A panic ensues not just on GM debt and securities, but also those of Ford.  Then it happens, fearing that it would face a tougher time if it stalls the filing, GM announces that it will go into Chapter 11.

Stage 2: The bankruptcy tsunami hits everywhere

The filing is released over the wire, immediatly suppliers who have not taken action call up GM.  General Motors stock is halted given the volume of orders, by proxy, Ford falls below a dollar on the heaviest volume in the share's history.  On CNBC, Phil LeBeau is reporting that management will order all production shut until it can secure needed supplies.  Despite many facilities having between 30 days to 120 days worth of supplies, management feels that it needs to make sure that beyond that they can remain operational.  

So now that General Motors has declared Chapter 11 Bankruptcy, what happens next?  Or more specifically who gets hit?  Below we go into as many parties as possible that will be affected by the filing.  Due to time and space constraints, I cannot go into every possible "victim."  

The Shareholders

As stated previously, most Chapter 11 filings wipe out the shareholders of a company's stock.  Eventually, should the company emerge out of receivership, they will float a new set of shares.  Yet this does not help those who could not sell their stock in General Motors.

Institutional investors like pension funds, hedge funds, equity vehicles like open-ended sector-specific or index specific mutual funds will take a beating.  Besides the shares they own in General Motors, shares in companies related to the auto industry will also fall.  From auto parts suppliers to financing companies that don't even deal in auto loans will fall; for the market, it is only another excuse to go down.  Depending on the velocity of the collapse in prices, expect black box systems to activate like they did in previous market sell offs, these "artificial intelligence" (I use that term loosely) programs to begin their shorting of stocks or futures.  This will in turn cause the market to go down even further.  Though GM's market capitalization is no where near where it used to be, if you add in all those companies' float that have some sort of relation with the motor company, you start to see how things can get out of hand.

The Employees within the company

General Motors employs about 284,000 people all over the world, half of this figure are within the United States.  This does not include folks who work at the dealerships.  Now a bankruptcy filing most likely would cause the company to halt or slow down exponentially operations overseas.  This could lead to a reduction of between half to all of the 142,000 employees overseas.  Domestically, expect similar results, as suppliers and creditors begin to balk at aiding the company without assurances from the government.  

It is already said that the company has excess production capacity.  Any Chapter 11 filing will immediately entail the sale of assets to meet creditor demands.  This would mean the elimination of product lines as the sale of land and dismantling of factories for scrap or what have you to get cash.  Remember, bankruptcy filings of this sort is for the corporation to get as much cash as possible to meet it's obligations.  Employees who worked on the now-discontinued lines will most certainly be out of job.

The United Auto Workers will also be without an leverage here.  Chapter 11 filings tend to give the advantage to management versus the labor organization.  The filing will do to the UAW's contracts what it did to the shareholders' stock, make them worthless.  The unions could protest and refuse to go back to work, but this would only force the company to seek more drastic means of raising cash or worse...Chapter 7 which is total liquidation of the company.

I would suspect, that to keep even minimal operations, a judge most likely will preside over any sort of labor negotiation.  Now I will admit, I am not aware of any laws on the books in Michigan that may state the otherwise, they could have legislation in place that could keep some of the contracts' specifications in place.  But I suspect that GM will put the screws on the state and federal government, and thus the judges, and will offer the UAW one of those "offers they can't refuse."

This could mean the elimination of the current hourly or salary wages already bargained for.  Benefits would be suspended.  Though the UAW had a grand bargain with the company over the transference of health benefits and pensions, a bankruptcy filing throws that out the window.  Essentially, everyone, and by the way that includes white collar works as well, will start from scratch.

Pensions and the PBGC

A bankruptcy filing will cause any GM-managed pension to be shifted over to the Pension Benefit Guaranty Corporation (PBGC). Any funds still residing within GM will be taken to meet the demands of other creditors.  The filing will also have an adverse effect on all retirees.

The PBGC is already suspected to be underfunded.  I really wish CNBC would allow better usage of their video for net usage.  A few weeks ago, the director of the Pension Benefits Guaranty Corporation was on Fast Money, and he was grilled.  When asked how the fund that makes up the PBGC is doing, he was upfront that they are running a small deficit.  Yet the shocker came when he says that the fund tracks that of the S&P 500.  Well, since October, my friends, the "Spoo" has been down almost 33%!

Regardless, the Pension corp doesn't have enough cash to meet the demands of those already retired and those who will be.  It probably will get funding from Uncle Sam to meet it's needs should this calamity occur.  But given that GM declared bankruptcy and precarious nature of the pension corp itself, the PBGC would use this as provide GM's pensioners with a lower payout.  The money is simply not there for those retirees from the PBGC.

Health insurance for workers and retirees

The one small consolation to those who retired from GM is that there is Medicare.  It isn't much, but the situation for those who have yet to retire will be much worse.  During this time, there was a transition going on where GM would turn over the management of health benefits to the unions, in return the company was supposed to grant them several billion dollars. This is known as the Voluntary Employees Benefit Association or VEBA.  In a bankruptcy filing, all this as well goes out the window.  A preview of this came last July, which caused something of an uproar.  

Under a Chapter 11 filing, GM could get a judge to cancel all health benefits or force a third party to take over such responsibility.  Retirees who get some sort of health benefits package from GM could see those get curtailed or eliminated outright.  If I were the UAW, I would begin to have something in place just in case.  The same should be for non-retirees as well.  Though scheduled to take over in 2010, any filing now or before then would force the unions to take action almost immediately.  They could have a judge seek some sort of assistance, but if they wish to be labeled a creditor, I suspect they also will be way behind the line.

The suppliers

It is said that for every auto worker job, there is between 4-10 jobs connected to it.  Suppliers are probably half those jobs.  Any shut down of operations, even discontinued lines, will affect these companies.  Expect them to almost begin scrambling to find new clients like perhaps a foreign car maker.  Also expect them to announce cut backs in production and layoffs.

These suppliers, in turn, have suppliers who also will be feeling the pinch.  A cascading effect will begin, as everyone from major contractors like GE to smaller independent tool and die shops take the hit and cut back.  They will shut down lines if they can't get a customer, and for smaller enterprises, probably be out of business entirely.  You have across the country, in smaller towns and cities, companies that have nothing more than small industries tied to one sector of the economy.  This will also be going on across the globe as well, as GM's foreign operations are paired down, and foreign suppliers are forced to seek clients elsewhere or shut down.

Many smaller industrial companies already are struggling.  Many face an onslaught against foreign competition that either has a cheaper work force or is subsidized in some manner.  For these smaller "ma and pa" plants who employ between 100-500 workers, GM or one of it's supplier may have been one of their big time customers that just put them in the profitability column.

The Retailers and local economies

Dealerships will be especially hard it. Customers will be weary of purchasing an automobile from a company that just declared bankruptcy. Questions regarding warranties and service will be on their mind. Corporate clients who replace fleets of automobiles, like say those rental car companies, may also be hesitant on purchasing regardless of a volume discount.  

Following the Chapter 11 filing, with news of production shutdowns, what's on the lot may very well be the last of the line.  Dealerships that only specialized in a select brand of cars will also have to scramble to find a new supplier.  What if they can't get those new 2009 or 2010 models?  Expect massive die-offs of dealerships across the country, coupled with layoffs of salespersons and mechanics.  Of course, with all those GM cars and trucks still on the road, there will be opportunities for the latter.

Local economies, especially those in places where a the auto industry served as the life blood, will get slammed.  As production is wind down, workers facing an uncertain future will cut back in their spending.
Plant closings of suppliers or production lines of GM could render some towns what the end of the gold rush did to many in in the West.  

Municipalities

The collapse in the local auto/industrial based economy will cause tax revenues to fall. This will require townships to either raise taxes, not exactly a great thing in a depressing economy, or go into the bond market.  Yet here they will find difficulty.  As it looks as if tax revenues will drop, coupled with the collapse of the financial industry, the cost to float a new bond will most assuredly be higher.

Counties will have to cut back in their spending.  This will mean closure of facilities and roll back on services.  Don't be surprised reading about how everyone from garbage men to teachers are now out of a job.  This won't just be in states like Michigan, but also California and across the nation.

We now find ourselves in another situation, something that hasn't been discussed much.  That is the situation involving credit default swaps and municipal bonds.  None of the banks or financial institutions have come clean on this, yet this isn't surprising as they haven't with the ones dealing with mortgages.  Yet even Forbes magazine (appologies, I can't find the article at the moment) had a column that discussed this very thing.  Declining tax revenues will most likely raise the possibility of counties defaulting.  This could lead to another wave of financial failures as the swaps come due.  We don't know how many have been offset, and we won't know until the crap hits the fan.

---------------------

Well these are just some of the factors one must add into the equation of a bankruptcy filing by General Motors.  I appologize if I didn't provide more evidence or links or what have you.  My original version of this article piece was about 20-pages long, and I am already afraid I lost you somewhere on here already.  

In our next segment, I will go on to some of the things that we should look into.  Many of what I will say you, my Ming-like Kossacks (Ming, I learned is Chinese for brilliant), have already stated.  The fact is, in the long run, despite our misgivings of the company, I think it would be far more expensive to just allow them to go bankrupt.


Cross posted on The Economic Populist and Venomopolis.

Oh...wait...something you should know.  In most bankruptcy filings...the management is replaced.  So if we're lucky, a new set of folks will take over and this time get the job done right.

Originally posted to Johnny Venom on Wed Nov 12, 2008 at 04:57 PM PST.

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Comment Preferences

  •  Tips jar and whiskey bottle (12+ / 0-)

    Thank you for reading my latest diary entry. I am hoping for the best for the workers on the line at these plants.  We really need to bring the jobs back and save our industrial base.

    corporations interpret "loyalty" the way a prisoner might interpret "dropping the soap"

    by Johnny Venom on Wed Nov 12, 2008 at 05:02:04 PM PST

    •  Our news said tonight (2+ / 0-)
      Recommended by:
      Johnny Venom, Interceptor7

      that it would affect one of every ten workers in the country...I guess that means suppliers, insurance companies, etc...not sure...but that is a lot of people.

      Then, those one in ten do not buy anything, not even a McD hamburger so places close down, and so it goes...

      thank you for a good diary trying to explain...

      Join us at Bookflurries: Bookchat on Wednesday nights 8:00 PM EST

      by cfk on Wed Nov 12, 2008 at 05:08:38 PM PST

      [ Parent ]

  •  If Gm goes, so will Ford and Chrysler (6+ / 0-)

    Forbes wrote over a year ago that a BK by Gm would allow them to sell assets(read cars) at drastically reduced prices.
    Gm cars would sell at unseen discounts, perhaps half of sticker.
    The resulting loss of business to Ford and Chrysler due to cheap GM prices would force both Ford and Chrysler into BK as well.
    Ford is in even worse shape than GM because it's plants are not as flexible.
    GM has invested billions in modernizing their plants to be able to change models quickly and cost effectively.
    Their infrastructure is good, so theoretically they could change to smaller cars fairly quickly.

    -7.88/-4.41 "Republicans are men of narrow vision, who are afraid of the future." Jimmy Carter

    by Interceptor7 on Wed Nov 12, 2008 at 05:28:02 PM PST

    •  the excess inventory, (2+ / 0-)
      Recommended by:
      shann, dansmith17

      and the damage to the other car companies that GM could do in liquidation, is GM's biggest bargaining chip.  It should be taken away from them, perhaps by putting Ford in charge of the liquidation sale.  Liquidation must be orderly, so that the remaining companies survive.

    •  Actually, Ford (0+ / 0-)

      is in a better position than GM. Ford has more cash on hand and started making fundamental changes when Mullany took over as CEO.

      "The most virtuous hearts have a touch of hell's own fire in them" Tennyson

      by Void Indigo on Wed Nov 12, 2008 at 07:27:14 PM PST

      [ Parent ]

  •  Link please (1+ / 0-)
    Recommended by:
    Johnny Venom

    to the first article in this series?

  •  thanks (4+ / 0-)
    Recommended by:
    Brian Bell, cfk, RogueStage, Johnny Venom

    I need to print this info out for my parents who are on a GM pension. They are very concerned.

    "Every Pootie is a masterpiece." - Da Vinci

    by mdsiamese on Wed Nov 12, 2008 at 05:35:43 PM PST

    •  Oh my (2+ / 0-)
      Recommended by:
      Brian Bell, cfk

      I really am hoping that they fix this thing.  Its folks like your parents that have me worried about all this.

      corporations interpret "loyalty" the way a prisoner might interpret "dropping the soap"

      by Johnny Venom on Wed Nov 12, 2008 at 05:38:10 PM PST

      [ Parent ]

    •  Mine too. (3+ / 0-)
      Recommended by:
      Brian Bell, cfk, Johnny Venom

      My father's health insurance already got switched from an employee plan to Medicare (effective when he turns 65 in June - or maybe earlier, depending on events). His stock in the company is now worthless. And only part of his pension is 'fully funded.' Plus, if 'fully funded' means 'sufficient capital invested in the market to ensure returns that will pay for the outlays,' it probably means 'we were fine a year ago, and now we have about half of what we need.'

      At least my parents own their house. And they just downgraded - sold out of a bigger one - close to the peak of the market. That's the one bright spot.

      O it is excellent to have a giant's strength: but it is tyrannous to use it like a giant. --Measure for Measure, II.2

      by RogueStage on Wed Nov 12, 2008 at 05:56:18 PM PST

      [ Parent ]

  •  Very Torn (1+ / 0-)
    Recommended by:
    Johnny Venom

    GM's management, as you note, is largely to blame for the straights of the company.  Also, after having watched Who Killed the Electric Car there is a part of me that says screw GM.  You gave up your leadership in electric cars to Toyota and you have to live with the consequences of that decision.

    However, I know the letting them go bankrupt would be a huge drag on the US economy.  I don't like the idea of bailing out GM but if we do their entire management must go and be replaced by people better able to adjust to the needs of the 21st Century.

  •  Someone wrote a thread about Detroit and (1+ / 0-)
    Recommended by:
    dansmith17

    said that, while the immediate consequences would be devastating, it would be better for Detroit if the big three automakers finally went out of business. The poster argued that Michigan and the Detroit economy could begin rebuilding into something more realistic.

    I am torn here. I feel for the UAW, but I also think that some of their demands are responsible for GM's near-death status. At the same, time, though I do agree that most of the other automakers exist in countries that do have national healthcare. GM has to assume those costs on its own.

    I think, though, that Chrysler, Ford, and GM are dying companies. Giving them any more money is probably just postponing the inevitable. It's akin to giving money to a drug addict or beer to an alcoholic. It's throwing more good money down the drain after bad.

    I think that whatever bailout funds do go to GM, they should go to the workers' heatlh care costs and assistance with helping them find other jobs. I don't see how GM's business model can stay viable in the long term.

  •  well (1+ / 0-)
    Recommended by:
    Johnny Venom

    deep subject
    I read your diary. as someone who's unempolyeed it only makes things..................................

    Thanks for posting

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