Bankruptcy may not be Enough for Auto Manufacturers

Author: David S. Lefere
Date: 07/13/2009

After months of speculation both General Motors and Chrysler finally filed for Chapter 11 Bankruptcy. GM, the world’s largest car company for more than 75 years, has approximately $82 billion in assets and $173 billion in liabilities. Chrysler is considerably smaller. While both companies attempted to restructure their liabilities outside the protection of the Bankruptcy Court, in the end, Bankruptcy was inevitable. Both companies are using the Bankruptcy Courts to allow them time to restructure their debt, get rid of bad assets and transfer good assets to a new company.
The major difference between the two Bankruptcies is that GM’s bankruptcy plan will leave the United States Government as GM’s major owner, by its supplying more than $50 billion in taxpayer money to support GM through its Bankruptcy and turnaround. GM’s Bankruptcy is unique within a Chapter 11 Reorganization Plan in that it didn’t seek out a private purchaser for its assets but instead relied upon the U.S. Treasury to bail them out. No doubt, there will be discussion and debate about whether this should have happened for years to come; however, there is also no doubt that a total collapse of GM would have caused economic chaos not only in Michigan but throughout the United States.
By contrast, Chrysler used bankruptcy protection in part to cement a sale of key assets to another business entity, Italy’s Fiat. This sale was recently concluded and by the time of the printing of this article, Chrysler may have very well emerged from Bankruptcy. Chrysler actually sought out a purchaser for its assets instead of relying on the United States Treasury to be the major owner of the new company. This is not to say that the U.S. is not a part-owner of Chrysler because the U.S. Treasury did support Chrysler as well. However, the U.S. Government is not the majority stakeholder in the new Chrysler company.
Ultimately, and perhaps most importantly, both GM and Chrysler must regain the trust of the American people whose loyalty to these brands was based not only on craftsmanship and reliability, but on patriotism. GM and Chrysler, notwithstanding the hurdles they must overcome within the Bankruptcy Court, may have a bigger hurdle in attracting and solidifying a dedicated client base in a public that wants automobiles that are a good value and have superior quality. Without clearing this hurdle, the future of Chrysler and GM may still be in jeopardy.