Force the Parties to the Table Instead


A great deal of recent debate has focused on whether the Government should bailout the Big 3 or whether the better course is to allow the domestic automakers to fail. This debate, however, is missing the real point and is premised on the mistaken belief that bankruptcy equals failure. Bankruptcy professionals understand that bankruptcy does not equal failure and does not always mean liquidation. The real choice is not between bailout and failure, but how to determine the appropriate process to restructuring the US auto industry.

Until recently most felt the choices were between a bailout, which was seen as throwing away money, with little chance for real change or a bankruptcy filing, which was viewed as doomsday, mostly because of a lot of puffery and hot air coming from Congress and the Big 3. An informed analysis, however, reveals that it is a combination of both that is required.

As this article went to press the White House announced its plan to provide immediate TARP funds for GM and Chrysler to avoid a meltdown at the holidays. Some say this changes the calculus and an optimist might even say this is exactly what we need, creating the kind of process that is less extreme and less risky than a bankruptcy filing, but yet still provides the kind of incentive and motivation to spur the needed negotiation and belt tightening that will allow the automakers – and their various constituencies – to make real changes and survive. Unfortunately, this view is too optimistic. While the White House Plan on its face sets certain milestones that might be used as guideposts to negotiate around, the plan has too many loopholes and is too mushy (that being a technical term) to provide any benefit – to anyone other than our soon to be former president, who avoids being known as the next Herbert Hoover.

The Bush bailout plan by itself does nothing more than ensure none of the Big 3 will file bankruptcy before Obama takes office. A close examination of the terms makes clear that the new president may change any of the terms and the major parties – not surprisingly, first being the UAW, have already begun to lobby for such changes. Before even the sun set on the White House announcement, the UAW announced that it would work with the Obama administration to ensure that the “unfair conditions” of the plan are removed. Of course, this means the UAW will fight to avoid any changes to its treasured collective bargaining agreement.

But it is too early to determine the effect the plan will have, primarily because we cannot yet predict how it will be altered by the new administration. Perhaps it will become the first step towards a process of cooperation and coordination between the government and the automakers. At this juncture, the most important step is to break the stalemate that currently exists. No party is willing to admit that true change is necessary and that those changes will be difficult. Each party is holding out hope that the government will step in and save the day. Even if this happened, it could only be a temporary reprieve and will do nothing to solve the problem. The problem is not simply a result of the current global meltdown, but rather, the US auto industry simply cannot compete on price with foreign competitors because of the high costs including pensions, benefits, and debt. This can only change if all the parties get together and agree to sacrifices.

The first – and most important – step is to force the parties to the bargaining table. This is where the Chapter 11 process works best. Any good litigator experienced in bankruptcy cases knows that his or her job is to get his client into the best possible negotiating position – not to ultimately win in litigation. There are other methods to compel the parties to work together - and maybe the Obama Administration will be able to use the Bush loans – and their required repayment – as that turning point.

There is no question GM and Chrysler will be unable to repay the loans as they come due in less than 4 months. So the question becomes what to do about it. The government can forgive the loans, extend their maturity or allow a bankruptcy filing. Any of those, however, are likely to require additional funds. It is always possible that banks will begin lending again before that time or Cerberus might actually reach into its pocket to fund Chrysler’s losses, but likely it will again be the government. So should Obama begin negotiating the terms of the DIP loans? This would get the parties focused on the end game and set the terms of the process.

In order to achieve any level of success, two things are clear. First, government money will be wasted unless it is coupled with specific milestones for change and a quick timetable for achieving those goals. This should be the centerpiece of the negotiation of the DIP financing. In fact that is not unlike what occurs in most Chapter 11 cases, where the lender agrees to finance a process, but only does so when it knows there is a strategy and an end point. Second, change will not be effectuated unless there is risk and a process designed to motivate all the parties to agree to change, so as to avoid those risks. This is the basic foundation of Chapter 11. The parties each understand that there are risks and each one is forced to negotiate in light of those risks.

The White House plan may leave open too many loopholes to achieve these, but on the other hand, uncertainty often leads to settlements and it may be this uncertainty that leads parties to begin bargaining on a focused, reasonable basis intended to bring broad, long term change. To date, no real efforts have moved forward because all the parties hope the government will save the day and no one will be forced to accept the pain that is necessary to allow the US automakers to survive. Now that certain parameters are set (even as loose as they are) the parties should understand that the time for negotiation is here and they can no longer wait and hope.

Schuyler Carroll is a partner in the Financial Restructuring and Bankruptcy Group of Arent Fox LLP and resides in the New York office. Arent Fox LLP represents many parties involved in all aspects of the domestic and foreign automotive industries, including certain trade associations. The opinions expressed herein are solely the opinions of Schuyler and do not represent the views of Arent Fox LLP, any other partners or associates of the firm or any clients of Arent Fox LLP.


Date published: Jan 07, 2009


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