Why GM Says Bankruptcy Is an Impossibility

WSJ colleague John Stoll files this dispatch on the troubles at the biggest U.S. car maker.

One must be careful when using the B word, as the mere mention of the word bankruptcy can be a self-fulfilling prophecy.

Then there is General Motors, which posted a staggering third-quarter loss and surprised the market with the rate at which it is burning cash. The auto maker today declared that its cash position, at $16.2 billion, isn’t enough to keep it going through next year without immediate government intervention. It needs $11 billion to $14 billion on hand just to pay its monthly bills.

It wants money. It needs money. And that is causing some to throw around that B word: The “third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy,” Gimme Credit auto analyst Shelly Lombard said.

And yet GM executives refuse to blink, sticking to their guns when it comes to insisting that the General isn’t interested in a Chapter 11 filing to fix its problems. On Wednesday night, in a speech given to auto suppliers, GM North America President Troy Clarke said there are a few reasons the company isn’t rushing to bankruptcy court. First, obtaining debtor-in-possession financing would be practically impossible, given the state of the credit markets and the size of GM’s obligations.

Clarke then went on to say that GM has worked to solve two of the issues that many companies use Chapter 11 to fix: legacy costs and capacity utilization. Last year, GM brokered a historic deal with the United Auto Workers allowing it to eventually shed health-care obligations and potentially cut labor costs, such as wages and benefits. On the capacity side, Clarke said GM has worked extensively in the past three years to shave its manufacturing footprint in the U.S. to an appropriate size.

Of course, GM has to wait until 2010 and pay out $7 billion to take advantage of that UAW deal. And, with U.S. automobile demand collapsing further each month, GM’s capacity issues look to be far from solved. Interestingly, he avoided any mention of the concern GM often attaches to bankruptcy speculation: that people won’t buy cars from bankrupt auto makers.

GM Chief Executive Rick Wagoner wasn’t as circumspect Friday. During an interview with Fox Business News, he was asked why the company doesn’t just utilize the bankruptcy method to recapitalize itself, given that some observers suggest such a method would be much easier than the out-of-court headaches GM has been managing over the decade.

“The analysis is wrong,” Wagoner said. “What is left out in that is it assumes people will keep buying your cars, and unlike airlines–(where people) pay $300 for a ticket and use it three days from now–it’s quite a bit different than paying $25,000 and paying on getting service and support for the car you just purchased for the next five or 10 years.

“In fact, there has been some independent research that was done as recently as June of this summer which asks for every manufacturer, ‘if this manufacturer were in bankruptcy would you buy a car from them?’ Eighty percent of the people said they would immediately take that manufacturer off their list.”

Wagoner said that, in light of people’s reluctance to shop a bankrupt car company, a Chapter 11 filing may actually be impossible for GM. “If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation.”

In a conference call Friday, Mr. Wagoner said “this is the kind of thing we could speculate (on) endlessly.…We’re convinced the consequences of bankruptcy would be dire.”

GM’s solution? “We’re going to get creative, we’re going to get creative here,” Chief Financial Officer Ray Young said.