Pur Autre Vie

I'm not wrong, I'm just an asshole

Wednesday, November 19, 2008

There Is a Spectre Haunting GM

A big debate has commenced about the fate of GM. On the left, you have various people pissing me off with their sloppy reasoning and overall ridiculousness (the Cohn piece is better-reasoned but, I feel, deceptive about the tradeoffs we face). Right-wingers simply don't want a bailout, arguing that it wastes money, creates bad incentives, and may create "zombie firms" that soak up resources and function poorly. For once, I agree - you really don't want to be propping up failed businesses as a general matter.

I do think the leftists are right about one thing - a rapid liquidation of GM at this moment in time would be disastrous. The credit markets are not fully functional, and firms in bankruptcy need cash to operate. The worry is that in the current environment, chapter 11 won't provide much relief and GM will simply implode. Now is a very bad time to be laying a bunch of people off, particularly if GM is more valuable as a going concern (or if pieces of it are more valuable as going concerns - an orderly liquidation might not be so bad, because most of the factories can keep operating, just under different ownership).

An idea has started floating around the world of bankruptcy - maybe the government should provide financing for GM to operate in bankruptcy. The name for this is debtor-in-possession (DIP) financing. The idea would be to give GM a real shot at a chapter 11 reorganization, taking advantage of the bankruptcy system's long experience in running reorganizations.

Conservatives have seized on this idea. Their motives may or may not be pure - this may be the smallest bailout they think they can get, even though they would prefer nothing at all. They also may like the fact that collective bargaining agreements can be abrogated in bankruptcy more easily than outside it.

Ultimately, whatever their reasons, I think the conservatives are right on this one. They are drawing on the things that smart bankruptcy professionals and academics are saying (the first person I know to have floated the idea was Douglas Baird, on CNN, but others might have talked about this previously). The New York Times had two pieces making the case for a bailout in the form of a DIP loan. And the conservatives aren't the only ones in the political sphere who see the logic of a government-backed DIP loan - Matt Yglesias is presumably on board as well.

Ultimately, the logic is almost too obvious. Chapter 11 embodies our knowledge and our policy choices about dealing with insolvency, and GM is insolvent. We've made our choices about insolvency, now it's time to act on them.

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