Felix Salmon

Antony Currie says that it’s possible to structure a GM bailout so that it behaves like a bankruptcy without being called a bankruptcy:

If an official bankruptcy label is really too scary, another template already exists: the government bailout of Chrysler almost 30 years ago, when shareholders, bondholders, car dealers and employees all made considerable concessions in return for federal financial support. That sounds like a Chapter 11 process, but was never labeled as such.

Brian Johnson of Barclays Capital has an idea of how such a GM bail-in might be structured, in a research note dated November 10:

To create a long-term viable company (and thus protect taxpayers), lawmakers

and/or Treasury may choose to follow an approach similar to the Treasury’s assistance to Chrysler in 1979-81…

We assume that existing long-term debt is exchanged for new, government backed debt for 30 cents on the dollar

and a substantial portion of the recapitalized GM equity. Similar, the 2010 VEBA contribution of $7 bil cash, $4.4 bil of covert

debt and $5.6 bil of future payments, is swapped at 60 cents on the dollar for new government backed bonds along with

equity…

The Federal Government would purchase $8 bil of TARP-like preferred stock of loans for 2009 cash needs… As GM may

not meet ‘viability’ requirements for Energy Bill assistance, we assume $2 bil in an Energy Bill loan. The total Federal support

package would be $30.7 bil: $20.7 of bond guarantees, $8 bil of Tarp-like preferred, and $2 bil of energy bill loans. As in the

Chrysler deal or the TARP program, we assume that the government would receive equity or warrants in GM – based on

TARP, we have assumed 15% of the value of the loan package, or about 17% of the recapitalized company, if exercised.

As in a Chapter 11 proceeding, most of the equity in the recapitalized company is distributed to debt holders and to ‘exit

financers’ (in this case the Federal Government), in rough proportion to their contributions. We assume, somewhat arbitrarily,

that about 2% of the reorganized company, or $1 per current GM share, is left with current shareholders.

This is just the way that the finances are worked out, of course: any agreements about the future direction of the company, and specifically how fuel-efficient its new vehicles will be, would have to be worked out in parallel. GM would also be very well advised to take this opportunity to slash the number of dealers and marques it has. In any event, this kind of a deal would have the same effect as the US government providing debtor-in-possession financing within bankruptcy, without the negative headlines associated with a bankruptcy filing.

Would bondholders accept such a deal? Given where GM debt is trading, yes, I think they would — although I don’t know how US law would deal with holdouts who didn’t want to take the government up on its offer. That’s one area where bankruptcy is useful. But I’m sure a bailout bill could deal with recalcitrant bondholders in a clause or two. The tougher thing will be to get the lame-duck Bush Administration on board with this kind of a deal: if this has to wait until January, GM’s position will be significantly worse.

Barack Obama addressed the GM situation on 60 Minutes last night:

Mr. Obama: My hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan what does a sustainable U.S. auto industry look like? So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere. And that’s, I think, what you haven’t yet seen. That’s something that I think we’re gonna have to come up with.

Kroft: Are there a lot of people that think that the country would probably be better off and General Motors might be better off if it was allowed to go into bankruptcy?

Mr. Obama: Well, you know, under normal circumstances that might be the case in the sense that you’d go to a restructuring like the airlines had to do in some cases. And then they come out and they’re still a viable operation. And they’re operating even during the course of bankruptcy. In this situation, you could see the spigot completely shut off so that it would not potentially permit GM to get back on its feet. And I think that what we have to do is to recognize that these are extraordinary circumstances. Banks aren’t lending as it is. They’re not even lending to businesses that are doing well, much less businesses that are doing poorly. And in that circumstance, the usual options may not be available.

I’m going to read this hopefully. Obama’s first answer explicitly includes lenders in the group of stakeholders which needs to put together a plan. And his second answer says, essentially, that bankruptcy can’t work if GM is unable to line up debtor-in-possession financing, which it might be able to do "under normal circumstances".

The answer, surely, is for the government’s "bridge loan to somewhere" to be extended within the context of some kind of bankruptcy, thereby providing the necessary "spigot". How else will it be possible for lenders — who, ex hypothesi, have no new money to lend — to play any part at all in the workout? Is there any way for bondholders, for instance, to write down the amount of debt they’re owed, absent some kind of bankruptcy procedure?

I don’t think it’ll happen, though. Obama wants a plan from the stakeholders, including management and the unions; never in a month of Sundays will management and the unions ever come together to propose bankruptcy. If the bail-in option happens, it’s going to have to be driven by the government — and right now there’s no indication that the government is driving anything at all.