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Like a lot of folks, I'd been assuming that if GM went bankrupt, it would just go into Chapter 11, restructure, and continue operating. But Jon Cohn's article on the auto industry woes -- which is by far the best piece I've read on the subject -- suggests that that's probably not true:
while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.Cohn's article argues, also, that this crisis is not just the latest coughing fit in the American automotive industry's decades-long decline. Rather, Cohn says that his reporting showed the industry has actually implemented many of the reforms folks would want, but that amidst their transformation, they were hit with an "unexpected trifecta of high gas prices, vanishing credit, and a deep recession." Cohn says that the difference between them and the Japanese automakers is, at this moment, cash reserves more than business practices or car quality. Indeed, Ford is now about as reliable as Toyota and Honda, while Chrysler's factories match Toyota's in productivity. All of this would make the auto industry a fairly good candidate for a conditional bailout, and given the harm that 3 million lost jobs would inflict on an already-sagging economy, it may be a good fiscal move, too. In any case, read the whole thing.
