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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Tuesday, December 09, 2008

GM Should Be Forced Into Bankruptcy.......

First, do not believe the hysteria about the loss of jobs from a bankruptcy. United Airlines has filed for bankruptcy several times over the past 2 decades. And they continue to fly passengers safely to hundreds of destinations around the world and employ numerous people to provide that service.

To be clear, there is a difference between Chapter 11 bankruptcy filing and Chapter 7 as seen in this Wikipedia entry....
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for the majority of private individuals with unsecured debts of less than $336,900.00 and secured debts of less than $1,010,650.00 as of April 1, 2007.
Chapter 7 just allows for an orderly sale of the firm as assets are sold and the proceeds are delivered to creditors. Chapter 11, on the other hand, allows for the organizations to be ongoing enterprises as they gain access to bankruptcy court sanctioned DIP- debtor in possession financing. When a company enters Chapter 11, management goes to the bankruptcy judge to get bank financing that is senior to other creditors to keep operating. Presumably, a Chapter 11 filing is what GM will do and this will allow for an orderly reorganization of business without many of the normal political and contractual factors that face operating enterprises.

So why are government officials so afraid of a bankruptcy of GM? There are several reasons:
1. A chapter 11 filing and the resultant need for additional cash through DIP financing may not be forthcoming from cash strapped banks when needed in several months.
2. Under a bankruptcy filing, contracts are abrogated and this means that all of the UAW contracts are broken and potentially renegotiated. Unions are huge supporters of Democrats and this is payback time for all of votes and money that came the Democrats way over the past several decades.
3. The government has been complicit in the decline in the US automotive industry as policy has meddled in the corporate decision making process. CAFE auto standards and safety mandates added cost without compensation.
4. A GM bankruptcy makes them more competitive compared to those not in bankruptcy as they will not have the same cost structure as the ones that remain solvent.
5. A automaker bankruptcy would pressure the parts suppliers and may cause bankruptcy of these entities that are owed money from the Chapter 11 filer.
Although some people find these arguments compelling, they are only compelling wrapped in ignorance. Bankruptcy allows for these companies to make the difficult choices that may not be offered to them in a solvent operating environment. Bankruptcy will strengthen the competitiveness of the American automakers as they will be allowed to shed some of the vestiges of the former American society that showered tax-free benefits on workers when they appeared to be reasonably priced.

Its only a matter of time before GM declares bankruptcy. Better to face up to in now and not waste taxpayer money on supporting a doomed business enterprise.


At 9:42 AM, Anonymous Anonymous said...

Too late now. It's the same old bullshit game. They say no the first time and then have them grovel to get their treat.....just like the financial groups. These people are selling the country down the river.
This government is not fit to rule.


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