Breaking Views

GM's mother of all scare tactics

The automaker reckons bankruptcy would cost $100 billion or more, making the extra $16 billion it wants look like chump change.

By Antony Currie, breakingviews.com
February 18, 2009: 10:21 AM ET

Find your next Car


(breakingviews.com) -- Why should U.S. taxpayers give General Motors another $16 billion in aid? After all, just two months ago the ailing carmaker claimed the first $13 billion would do the trick.

Because, as the company's executives argue in the recovery plan they submitted to the Treasury on February 17, letting GM fail and file for bankruptcy protection would require a stonking $100 billion or more in financing, the vast majority provided by the U.S. government. That makes its latest appeal for help look like chicken feed.

It's the latest twist in GM's argument against entering Chapter 11 bankruptcy protection, following on from last year's claims it would upend the U.S. economy, eliminate more than three million jobs and imperil national security.

Chrysler has adopted a similar approach, asking for another $2 billion - it's already got or been promised $7 billion - and claiming bankruptcy would cost up to $25 billion.

Why do they think a bankruptcy filing would cost so much? It's largely a result of sharply reduced revenues based on the belief that far fewer people would buy a car from a bankrupt manufacturer, plus support required for suppliers and dealers.

Bankruptcy would certainly be a painful process. But GM (GM, Fortune 500) and Chrysler are relying in large part on a couple of short research reports, neither of which presents its methodologies in full.

The logic is questionable. GM assumes bankruptcy would greatly damage its reputation. But the taint of failure is well established. After all, the last few years have been spent in crisis mode and the last three months in lobbying for ever increasing amounts of government assistance. Can its image really get that much worse?

The Obama administration has, at least, given some indication that it won't be soft on Detroit - hardnosed restructuring expert Ron Bloom has been brought on as an advisor and insiders are touting a bankruptcy of one or more of Motown's Big Three as a possibility.

Their job is to prove that the White House has the bite to match its bark and not cave in to scare tactics. But perhaps GM's cataclysmic claims are better directed at its other stakeholders.

So far it has yet to reach agreement with either the unions or bondholders, both of which would almost certainly fare much worse in Chapter 11. If GM's prophesies of doom could jolt them to take the necessary haircuts. To top of page


Company Price Change % Change
Bank of America Corp... 15.56 -0.23 -1.46%
General Electric Co 27.25 -0.03 -0.11%
Apple Inc 124.75 -1.42 -1.13%
Comcast Corp 58.42 -1.25 -2.09%
Microsoft Corp 41.62 -0.54 -1.29%
Data as of Apr 17
Index Last Change % Change
Dow 17,826.30 -279.47 -1.54%
Nasdaq 4,931.82 -75.98 -1.52%
S&P 500 2,081.18 -23.81 -1.13%
Treasuries 1.85 -0.03 -1.49%
Data as of 11:42am ET
More Galleries
Five things to know about Putin's Russia An economic crisis, Western sanctions and a comeback currency: What's going on in Russia? More
9 up-and-coming collectible cars They're relatively cheap now but these models have already caught collectors' eyes and are expected to increase in value in years to come More
How I got into an Ivy League school These twelve high school students share what it took to get accepted into Ivy League schools. More
Sponsors