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Thursday, November 20, 2008


government financing of automaker DIP?

luigi zingales promotes a government-financed chapter 11 reorganization for the automakers, who will otherwise likely be headed for liquidation.

The restructuring cost at GM will of course be high, both in human and financial terms. But the alternative is worse: to spend $25 billion on aggravating and postponing the problem. It would be better to give away that money directly to the workers rather than let GM decide how to dissipate it. At over $200,000 for each of GM’s 123,000 North American employees it would a very nice gift. The taxpayers’ cost would be the same, but at least the money would help secure a future to hard-hit households.

Overall, however, we believe that paying off workers and liquidating the company is equivalent to putting the patient out of his misery before attempting to administer the best economic medicine. Some may argue that GM has been receiving medicine from taxpayers for quite some time, but clearly it has been receiving the wrong medicine. A Chapter 11 bankruptcy gives a firm that needs to restructure the chance to recover. If Chapter 11 cannot save GM, then nothing can.

the question is whether the white house or congressional republicans -- many of whom seem uninterested in doing much to help -- would support even debtor-in-possession (DIP) financing where a bailout has gotten short shrift.

UPDATE: bloomberg is reporting a senate compromise bill, though the more zealous house republicans may not be on board.

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