The Road Ahead for GM and Chrysler

bankruptcy-loanMost informed analysts think we’re going to have a quick managed bankruptcy for both companies, with the U.S. emerging as majority shareholder. That’s the view of Steven Pearlstein, whom I respect as one of the least hyperkinetic and most measured observers of the economic scene.

Big haircuts will be the order of the day for all sides, because the government has the power to dictate a restructuring rather than putting the companies through liquidation and a piecemeal sale of assets. The UAW seems to recognize that it has no real leverage and has made concessions; it will have to go further.

Both Chrysler and GM bankers, however, are fighting for a lot bigger share of the pie than the government is offering. They want more cash and less equity in the failing companies, but it’s doubtful they will get it. Treasury asked Chrysler to slash 85 percent of its secured debt; the bankers yesterday offered 35 percent. It’s a high-stakes game of chicken, as some are calling it.

You can expect that this dispute will get hotter, since the government has already given a flat turn-down to the lenders’ proposal. Here’s Pearlstein’s scenario for the outcome:

Given the amount of money it is likely to put into the automakers, the government will be entitled to more than half of the stock of the reorganized companies. Then there is the union’s health fund, which will probably be entitled to stakes of 20 to 25 percent, reflecting not only the reduced cash payments it will receive but also all the other concessions made by active and retired workers. At Chrysler, there’s also the matter of Fiat’s contribution of technology and management services, which it offered for a 20 percent share.

That leaves only about 10 to 15 percent of each company. Bankers and bondholders will kick and scream and call it unfair, but in the end they’ll take it because, like everyone else in this adventure, they’ll conclude that it’s better than the alternative.

Yes, we are going to have an auto industry. What do you think it will look like after the presumed bankruptcy?

—jgoods



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