Bailout vs Bankruptcy, Obama Edition

Barack Obama addressed the GM situation on 60 Minutes last night:

Mr. Obama: My hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan what does a sustainable U.S. auto industry look like? So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere. And that’s, I think, what you haven’t yet seen. That’s something that I think we’re gonna have to come up with.

Kroft: Are there a lot of people that think that the country would probably be better off and General Motors might be better off if it was allowed to go into bankruptcy?

Mr. Obama: Well, you know, under normal circumstances that might be the case in the sense that you’d go to a restructuring like the airlines had to do in some cases. And then they come out and they’re still a viable operation. And they’re operating even during the course of bankruptcy. In this situation, you could see the spigot completely shut off so that it would not potentially permit GM to get back on its feet. And I think that what we have to do is to recognize that these are extraordinary circumstances. Banks aren’t lending as it is. They’re not even lending to businesses that are doing well, much less businesses that are doing poorly. And in that circumstance, the usual options may not be available.

I’m going to read this hopefully. Obama’s first answer explicitly includes lenders in the group of stakeholders which needs to put together a plan. And his second answer says, essentially, that bankruptcy can’t work if GM is unable to line up debtor-in-possession financing, which it might be able to do "under normal circumstances".

The answer, surely, is for the government’s "bridge loan to somewhere" to be extended within the context of some kind of bankruptcy, thereby providing the necessary "spigot". How else will it be possible for lenders — who, ex hypothesi, have no new money to lend — to play any part at all in the workout? Is there any way for bondholders, for instance, to write down the amount of debt they’re owed, absent some kind of bankruptcy procedure?

I don’t think it’ll happen, though. Obama wants a plan from the stakeholders, including management and the unions; never in a month of Sundays will management and the unions ever come together to propose bankruptcy. If the bail-in option happens, it’s going to have to be driven by the government — and right now there’s no indication that the government is driving anything at all.

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