Would it be better to liquidate GM?
May 27th 2009 9:00AM
Updated Dec 4th 2009 11:17AM
The CNBC Power Lunch shouters love to moan about how horrible it is that the government is putting money into General Motors (GM). They shout: "Why not just let it fail? After all, what good are free markets if they only work when times are good? We have a perfectly good process for handling failed businesses and it's called bankruptcy."
Of course this thinking works well when a business other than General Electric (GE) or CNBC advertisers are involved. But as far as I know, none of the Power Lunchers complained when the FDIC gave GE Capital a $139 billion helping hand last November so it could issue commercial paper. To be fair and balanced, I'd like to hear CNBC complain as loudly about government intervention on GE's behalf as it does when GM gets U.S. cash -- $19.4 billion so far.
Speaking of GM, it is days away from bankruptcy, and for the last several months, the choice has been between terrible (government-assisted Chapter 11) and catastrophic (Chapter 7 liquidation). The latest death rattle was a failed effort to get 90 percent of GM bondholders -- who hold $27 billion worth of the paper -- to accept stock in return for that debt.
The post-bankruptcy GM would give the U.S. 70 percent of the stock of a new GM -- which just sells Chevrolet and Cadillac products -- and another 20 percent to the UAW. To get from here to there, the U.S. will chip in $50 billion in debtor-in-possession financing and 1,300 more GM dealers will lose their franchises.
It's a terrible outcome that wipes out common shareholders and ends the livelihoods of thousands of workers. Unless the new GM can make money selling cars that people want to buy, all that new equity won't be worth a bucket of warm spit.
But liquidating GM would be even worse -- throwing hundreds of thousands of workers at GM and its suppliers out of work. So if CNBC's Power Lunchers point that out -- along with loud complaints about the FDIC's help for GE Capital -- I will gladly drink that bucket on air.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns GE shares has no financial interest in the other securities mentioned.