GM Set to File Chapter 11, Chrysler Set to Exit

In the most predictable event in bankruptcy history, GM is finally filing for Chapter 11 this morning. Uncle Sam will wind up owning a majority of the company with plans to inject another $30 billion in order to keep operations going while the creditors hammer out the details during the bankruptcy process. The US government will receive a 60% stake for its investment, while the Canadian government will inject $9.5 billion in return for a 12% stake. GM plans to eliminate all of its debt, halve its brands, shutter 2600 dealerships (out of 3600) and rewrite its labor contracts with its 56,000 employees. The bankruptcy process is expected to be swift, although complications may arise.

In a nice demonstration of tag-team, Chrysler is scheduled to emerge from bankruptcy as early as today, just one month after its filing. The administration managed to show all the naysayers that a quick bankruptcy for Chrysler was possible. Who knew that a little political jockeying, and the liberal sprinkling of TARP funds among lenders, would convince secured creditors to accept less than unsecured creditors in a bankruptcy? But it seems like the rules are rewritten every day when the government has a hand in the capital markets.

Although the long run consequences of the downsizing of the US auto industry are unknown, there is no doubt that having a streamlined, yet financially viable auto industry is preferable to the bloated uncompetitive mess we had before. The only problem is that the adjustment period is bound to be very difficult for the many whose livelihoods depended on a huge, bloated, inefficient auto industry. It’s not just the dealerships that have been forced to close, or the employees whose compensation and benefits will be slashed, not to mention those who will surely lose their jobs. What about the auto parts makers (some of whom are filing for bankruptcy too?) The advertising industry that relied on copious purchases of air time on TV and radio? Or the local economies that will suffer greatly as factories are shuttered and the tax base is eroded? Sure the easy part, (i.e. drafting the financial plan), might be behind us. But the hard part, that of filling the huge hole in the economy that the slimmer auto industry leaves in its wake, well that part lays ahead. That’s the part that concerns me the most.