WASHINGTON – It’s no secret General Motors has been in trouble for a long time.
The nation’s largest automaker has been teetering on the edge of collapse for months, losing billions of dollars, laying off thousands of workers and shuttering big factories as its vehicle sales plummeted. It’s a black hole for cash, but billions from taxpayers has kept it from imploding.
The same goes for Chrysler, which also limped along for months before filing for Chapter 11 bankruptcy in April.
So you might wonder: Why didn’t they file for bankruptcy months ago – last year, even?
Here are some questions and answers about the road to bankruptcy court for Chrysler and GM.
Q.Haven’t the two companies been in danger of collapse since last year?
A.They have. Auto sales have been falling for the past several years, but they took a big nose dive last year.
There are many reasons for this, but the big ones are a painful combination of a bad economy, a big jump in gas prices last year, and an industry that was still churning out gas-sucking SUVs at a time when more American consumers were looking for cars that were cheaper to fill up.
Clear warning signs came last summer, when GM announced a restructuring. By the fall, after the stock market crash and freeze-up of credit that made it hard to raise money, it became clear that GM and Chrysler could collapse within weeks without new cash. By December, the pair started receiving $17.4 billion in hastily arranged government loans.
Q.So why didn’t they just go straight into bankruptcy like other companies do?
A.The federal government feared bankruptcy would lead to chaos that would not only bring down the U.S. auto industry but rip a huge hole in the economy, at a time when it was already falling fast because of the housing and banking crises.
Here’s why: Bankruptcy is rarely neat and tidy. Companies use it when they don’t have enough money to cover their debts, which means it’s up to the courts to figure out how to repay them. That usually means painful restructuring that includes selling off or liquidating assets, rewriting labor deals, and significantly shrinking the size of the company.
In GM’s and Chrysler’s cases, that could have led to huge layoffs and shutdowns at not only their own operations but also the thousands of companies that rely on them. The auto industry supports a vast network of manufacturers who make the raw materials, suppliers who build the parts, and dealers who sell the cars. States depend on those companies for tax revenues and communities need the jobs they bring to town.
Some estimates put the potential job losses at 3 million if the two companies failed.
Q:But aren’t they going into bankruptcy now? What’s the difference between now and then?
A:It’s a matter of timing. With the government’s help, the two companies have already laid much of the groundwork for bankruptcy. That includes brokering new deals with unions, settling big chunks of their debt, and figuring out new ownership structures. Another key is that the government will provide more loans to help the companies stay running during bankruptcy.
It would have been hard to persuade any lender to do that if GM and Chrysler were on their own.
“They are too big to fail in an uncontrolled way,” said Aaron Bragman, an auto analyst with the consulting company Global Insight. “Here we are seeing a controlled failure.”
GM’s and Chrysler’s troubles also came at a tricky time, during the transition between the presidencies of George W. Bush and Barack Obama.
Q.Wouldn’t it have saved taxpayer money if Chrysler and GM had not gotten government loans?
A.That’s unclear. The government has sunk about $25 billion into both and could lend GM up to $30 billion more to help it get through bankruptcy. Some have questioned whether the government will ever see that money again.
Much harder to calculate would be the effect on taxpayers if the companies went under. For example, states would probably see their unemployment benefit payments soar. The government’s Pension Benefit Guaranty Corp. could have been on the hook for the company pensions. And the losses in tax revenues would have been huge.
Q.Would the companies have gotten out of bankruptcy more quickly if they went into it long ago?
A.If the government’s plans for GM and Chrysler come true, they won’t be in bankruptcy that long. Chrysler could come out after about 30 days, while GM may last from 60 to 90 days. That’s in part because much of the groundwork was done beforehand.
Bankruptcy cases can often move at a slow pace as the courts try to unwind a company. GM is such a huge company that unraveling it may have lasted a long time if they filed without the government’s support. For example, the energy company Enron filed for bankruptcy in 2001 and didn’t emerge until 2004 in what was one of the biggest cases in American history. GM will likely be as big or bigger.
Bragman said the backing of the Obama administration could help it move more quickly. But there is no guarantee it won’t be dragged out given how complex GM is.
Q.So what does this all mean for car owners? Doesn’t a long bankruptcy scare them off?
A.Bankruptcy is never a good thing for sales. The administration has tried to reassure potential buyers and owners by saying it will back warranties of both companies. Sales have been bad for the past several months, but it is unclear if that is the result of the lingering threat of bankruptcy or simply an ongoing decline in auto sales.
What remains to be seen is whether buyers will still want a GM or Chrysler car after the two companies are revamped.