Breaking Views

GM's mother of all scare tactics

The automaker reckons bankruptcy would cost $100 billion or more, making the extra $16 billion it wants look like chump change.

By Antony Currie, breakingviews.com
February 18, 2009: 10:21 AM ET

Find your next Car


(breakingviews.com) -- Why should U.S. taxpayers give General Motors another $16 billion in aid? After all, just two months ago the ailing carmaker claimed the first $13 billion would do the trick.

Because, as the company's executives argue in the recovery plan they submitted to the Treasury on February 17, letting GM fail and file for bankruptcy protection would require a stonking $100 billion or more in financing, the vast majority provided by the U.S. government. That makes its latest appeal for help look like chicken feed.

It's the latest twist in GM's argument against entering Chapter 11 bankruptcy protection, following on from last year's claims it would upend the U.S. economy, eliminate more than three million jobs and imperil national security.

Chrysler has adopted a similar approach, asking for another $2 billion - it's already got or been promised $7 billion - and claiming bankruptcy would cost up to $25 billion.

Why do they think a bankruptcy filing would cost so much? It's largely a result of sharply reduced revenues based on the belief that far fewer people would buy a car from a bankrupt manufacturer, plus support required for suppliers and dealers.

Bankruptcy would certainly be a painful process. But GM (GM, Fortune 500) and Chrysler are relying in large part on a couple of short research reports, neither of which presents its methodologies in full.

The logic is questionable. GM assumes bankruptcy would greatly damage its reputation. But the taint of failure is well established. After all, the last few years have been spent in crisis mode and the last three months in lobbying for ever increasing amounts of government assistance. Can its image really get that much worse?

The Obama administration has, at least, given some indication that it won't be soft on Detroit - hardnosed restructuring expert Ron Bloom has been brought on as an advisor and insiders are touting a bankruptcy of one or more of Motown's Big Three as a possibility.

Their job is to prove that the White House has the bite to match its bark and not cave in to scare tactics. But perhaps GM's cataclysmic claims are better directed at its other stakeholders.

So far it has yet to reach agreement with either the unions or bondholders, both of which would almost certainly fare much worse in Chapter 11. If GM's prophesies of doom could jolt them to take the necessary haircuts. To top of page


Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.