GM Bankruptcy or Bailout? We'll Know Soon. Very Soon.

Over the next few days, Congress and the White House will try to put together a bailout for GM, Ford and Chrysler. If they don't succeed, there will be a number of shopping days left before Christmas when GM institutes bankruptcy proceedings.

With all the publicity about its cash flow crunch, GM's suppliers are getting antsy about shipping parts without getting paid up front. Demands on GM's cash will increase at exactly the time when it is running out of cash. Some creditors may jump into court in an effort to collect on their debts quickly, before things completely fall apart. Without a bailout, the only way to stem the chaos would be a bankruptcy filing. And the filing would have to be made immediately in order to conserve as much of GM's dwindling cash reserves as possible. The company wouldn't want to burn down its funds and then file for bankruptcy, since that would leave it with no cash for a reorganization.

If there is no bailout, Christmas in bankruptcy could also be in store for Chrysler and major auto parts suppliers. Chrysler, too, has predicted that, without a bailout, it will run out of cash by the end of December. So its situtation is similar to GM's, and, without federal funds, it would have the same incentive to duck into bankruptcy court sooner rather than later.

The parts suppliers' problems could play out like this: if GM (and Chrysler) institute bankruptcy proceedings, they'll immediately stop paying trade debt in order to conserve their cash. Tens of millions and perhaps hundreds of millions of dollars of accounts receivable owed by GM and Chrysler to the parts suppliers would immediately be uncollectible in the ordinary course of business. (The parts suppliers would, in turn, stop shipping to GM and Chrysler until they got concrete assurances of payment for new parts, but that wouldn't get their old accounts receivable paid.) The nonpayment of accounts receivable would put the suppliers into a cash flow crunch, and could violate the terms (covenants) of bank loans they might have and bonds they might have issued. The cash flow crunch and covenant violations could put the parts suppliers in operational and legal jeopardy, giving them the incentive to file for bankruptcy as soon as possible in order to conserve their cash resources and avoid creditor lawsuits.

Once in bankruptcy, the future of these companies would be highly incertain. Consumers might well avoid buying a long term product like a car from a bankrupt company. Car buyers want warranties to be honored and replacement parts to be available. Without plenty of customers, the bankrupt companies' chances of successfully reorganizing would be somewhere between none and zero. The worldwide automotive industry has lots of excess capacity, because it was geared up for the boom times of 2006 and 2007, when auto sales were 40% or more higher than they are today. Toyota, Honda, Nissan and others would fire up their idle capacity and move with alacrity to supply more cars while GM's and Chrysler's creditors, suppliers, shareholders, management, and labor unions enriched lawyers sparring around in court. Lost market share would be difficult or impossible for the American companies to regain, because the trust between manufacturers and consumers would have eroded.

Ford, too, might have to follow GM and Chrysler into bankruptcy. It shares many suppliers with the other auto companies. If the suppliers are bogged down in bankruptcy, they may be unable to supply Ford adequately. Consumers may shy away from Ford, too, in the belief that it's near the brink. Of course, that belief could make a Ford bankruptcy a reality. Maybe a regulatory agency can prohibit short sellers from acting on the belief that a bank is about to go under. But the government can't force consumers to buy cars from an auto manufacturer they believe is about to go under.

Congress is expected to vote on the bailout next week. If there is no bailout, expect a GM (and very possibly a Chrysler) bankruptcy filing probably by late Friday afternoon or some time next weekend. They wouldn't need to file a bankruptcy petition at a clerk of court's office during regular business hours. All they'd need to do is find a bankruptcy judge with jurisdiction over the case and give him or her the filing, at home or somewhere else. Bankruptcy judges are cooperative about accepting petitions from publicly traded companies at odd hours. Filing during stock market hours could lead to messy trading--that is, messier than the mess that you'd have anyway.

News reports at the time we write this blog indicate that the Bush Administration and Congressional leaders are trying to put together a $15 billion bridge loan to tide the auto companies over until Barack Obama is inaugurated. Clearly, George W. Bush figures auto company bankruptcies could be really bad, and doesn't want that mess as part of his already very messy legacy. The Democrats hold the better hand. If there is a bailout, they can claim most of the credit for it. If there isn't a bailout, the GM and Chrysler bankruptcies will have begun on George W. Bush's watch, and the Dems can blame the Republicans. Then, with their increased control over the legislature in the next Congressional session, the Dems will be able to ride to the rescue with a massive stimulus package and secure the loyalty of large swaths of the electorate for potentially a long time. The leaders in both parties understand this dynamic. While many Republican (and some Democratic) lawmakers would rather drink horseradish straight up than vote for an auto company bailout, there seems to be a good chance that enough of them will go along with a bailout so that they can pass the hot tamale to President Obama when he takes office. If that happens, he'll truly learn what it means to have the buck stop with him.