Thursday, December 18, 2008
"orderly" bankruptcy for automakers
yves smith, in addressing the ominous reopening ot GM-chrysler merger talks, discusses how the flow of sentiment -- much as the lead-in to the lehman brothers bankruptcy -- has moved toward bankruptcy as the necessary reorganization tool in spite of the many difficulties it may present to the viability of the business.
With Lehman, the big unknown that should have been investigated was the true state of its balance sheet. With the Big Three, the wild card is how consumers would react. No matter how great theoretical advantages of Chapter 11 are, if a large proportion of customers abandon the company due to worries about its future, there is nothing to save. The Chapter 11 will morph into a liquidation as expected cashflows during the Chapter 11 process fall vastly short of anticipated levels. Assessing likely consumer reaction is far easier and less fraught than subjecting Lehman to serious examination would have been (there was a real risk that it could have fed concerns about the firm and accelerated its demise).
But as with Lehman, the public is developing bailout fatigue, and the carmaker's failings seem more obvious than those of the financial industry, and therefore less deserving of forbearance.
i would submit that an 'orderly' bankruptcy for the automakers is quite unlikely for so long as the credit default swap market exists in its current form. if credit events at GM and chrysler trigger collateral calls on the multiparty CDS that underlie huge piles of synthetic CDOs, bankruptcy here could well spark another wave of the illiquidity and forced asset sales such as was seen in the aftermath of lehman -- except this time, with trillions in synthetic CDOs on bank balance sheets being revalued from 95 cents to pennies or less, such a wave might be accompanied by massive bank nationalizations.