As General Motors finally filed for bankruptcy yesterday, some critics of the move have already made the case that Congress, not a White House task force, should have planned the bankruptcy. They are right about one thing: a White House task force should not have planned the bankruptcy. But they are 180 degrees wrong about what the government should have done. The bankruptcy needed much less “public policy” input, not more. If GM were going through a “normal” bankruptcy, here is what would have happened:
When it saw it was running out of cash last November, GM would have been forced to put together a plan that immediately stopped its financial haemorrhaging by selectively suspending its obligations and asked for protection from its creditors by filing under Chapter 11 of the bankruptcy code. To keep going through the process without liquidating, it would have had to get a debtor in possession loan (a high-priority loan secured by all the company's assets). As a condition of providing the DIP loan, the government, like a private lender, might have insisted upfront on installing a management committed to a successful bankruptcy. Once in bankruptcy, GM management would have been required to propose a reorganisation plan with a reasonable chance of success. GM would have been able to determine which contracts to reject, giving it the chance to restructure its dealer networks, supply and long-term debt, secured and unsecured. Crucially, using Section 1113 of the Bankruptcy Code, it would have been able to reform its labour contracts to the extent necessary to achieve a successful reorganisation. If its proposals are rejected by the union without good cause, the court can impose it.
During bankruptcy, GM would have been able to sell off divisions, facilities and brands. Finally, if a plan of reorganisation that was likely to get a better outcome than liquidation was proposed, the court would approve it and a “new” GM would emerge.