Chapter 10?

We have been hearing from many experts that bankruptcy is the only viable option for the automotive companies to emerge from their current troubles.  The costs for bankruptcy far exceed what the automotive companies are currently asking for, but there are some estimates out there that state either routes are a wash, costing up to $125 Billion.

So now there is an alternative to Chapter 11.  It’s called Chapter 10.  It isn’t legal yet, but Justin Hyde of the Detroit Free Press writes:

It’s not the kind of new chapter in the history of General Motors Corp. and Chrysler LLC that executives have in mind, but two bankruptcy experts unveiled a plan Thursday for a "Chapter 10" bankruptcy tailor-made for automakers.

While it’s just an idea, at least one prominent member of Congress, Rep. Barney Frank, D-Mass., has raised the possibility of changing federal law to allow automakers into bankruptcy while minimizing the damage to the rest of the economy.

"Chapter 11 for a ‘too big to fail’ company, such as a Big Three automaker, could be disastrous for the country," said George Kuney, a law professor at the University of Tennessee College of Law, and San Francisco bankruptcy attorney Michael St. James, in a paper for the American Bankruptcy Institute Journal.

Their so-called Chapter 10 plan would allow bankrupt automakers to keep paying suppliers for a regular flow of parts. Under current law, an automaker that filed for Chapter 11 would stop paying many bills for months or years, and suppliers have to compete with other creditors for repayment.

"By arbitrarily and unnecessarily putting all accounts payable on hold for months or years — a mandatory aspect of existing Chapter 11 law — the bankruptcy filing of one large company would likely result in cascading business failures among its vendors, and the vendors of its vendors," Kuney and St. James wrote.

Their proposal would keep regular payments to employees out of court while leaving other parts of the bankruptcy code unchanged, allowing the automakers to force new contracts with bondholders, dealers, suppliers and unions.

Of course, while the companies could survive, many people would lose their jobs, their homes, their livelihood.  An article in the New York Times has this to say:

After closing plants and shrinking their blue-collar work force, Detroit’s troubled Big Three are cutting white-collar jobs in their hometown at an unprecedented pace — more than 15,000 in the last year, with more to come.

White-collar workers who walk out of the headquarters of the auto companies face few prospects in the Michigan economy. And with G.M. and Chrysler surviving on federal loans, facing a deadline Tuesday to submit new and broader restructuring plans to the government, the outlook grows only more bleak.

The market for the skills of auto engineers or designers in the prime of their careers has evaporated, with no hope in sight for a turnaround. Moving to another city is hardly an option when there are so few buyers for the suburban homes that would have to be sold first.

G.M., Ford and Chrysler have eliminated a total of 120,000 manufacturing jobs in the last three years. And now the cuts are drastically thinning the ranks of white-collar professionals, turning the once-bustling office towers of the companies into half-empty monuments to better days.

G.M. delivered another blow last week when it said it would reduce its global salaried work force by 14 percent, or 10,000 workers this year. In the Detroit area, that could mean an additional 3,000 workers will be out of a job by May 1. G.M.’s next round of white-collar cuts will not include buyouts. Chrysler has not said whether it plans more cuts.

The Detroit area housing market, already deeply depressed, has plummeted since the buyouts. In January, the foreclosure rate increased 102 percent from the same month a year earlier in Oakland County, Mich., home to a huge number of G.M. and Chrysler employees.

The state’s unemployment rate was 10.6 percent in December and continues to climb. Job fairs routinely create mob scenes, drawing thousands of out-of-work employees of the Big Three and their suppliers.

The unemployment rate for white-collar occupations in Michigan was 5.4 percent in the fourth quarter of 2008, a full percentage point higher than the national average for those jobs, according to Department of Labor estimates.

Now before anyone out there thinks it cannot happen to them, think again.  I didn’t think there was going to be any problems, and in a matter of weeks, the bottom fell out, and I had to make some very difficult decisions (and the outcome is still pending).  It can happen to anyone in any industry.  If you do not think that this is the case, talk to people who have had plants close in the textile, steel, and machine tool industries.

And the government is going to help after letting all these other industries fall by the wayside.  Why am I not impressed nor hopeful?  Perhaps it’s because I know how government works, and the way committees are.  Both are like mating elephants – lots of noise and it takes two years for the results to show up.

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About Tom Roland

EE for 25 Years, Two Patents - now a certified PMP. Married twice, burned once. One son with Asperger's Syndrome. Two cats. Conservative leaning to the Right. NRA Life Member.
This entry was posted in Automotive, Economy, Government, Politics and tagged , , . Bookmark the permalink.

7 Responses to Chapter 10?

  1. I’m not sure that the American public understands the ripple effects should major car manufacturers go into Chapter 11.

    As pointed out here, employees would lose their homes. But many other industries located throughout the United States are tied to Detroit; already, the layoffs have started in those industries. Specifically, I’m thinking of the sellers of auto parts, which saw a downturn at the beginning of last year. Then, we have the various repair garages. Finally, there are the auto-sales dealers, which directly rely upon Detroit for stock.

    Here’s something else to think about….Suppose for a moment that new school buses and the parts to repair them were suddenly unavailable. That would certainly impact many, many homes in America.

    Maybe I should get my bicycle out of storage and start pedaling to work!

  2. Mustang says:

    Mr. AOW has convinced me that Mrs. AOW is always right, and I’m not going to argue with that point here. Of course, she’s right. Let me say this, however. Looking around this country, there are huge areas of utterly dismal poverty. Southwest Virginia, for example, is an area where there are NO employment opportunities. None. And, as with every complex issue, there are no easy solutions. Government cannot force companies into geographically depressed regions; government spending is merely a band-aid on a sucking chest wound, and so what we see in this one region is rampant economic depression and, as a corollary, escalating social problems.

    It is heartbreaking to see good, hardworking people lose their jobs. But let us recognize that organizations, whether private or government, tend to become top-heavy. This produces inefficiencies that at some point, if the organization is to survive, require some adjustments. For example, we frequently complain about government bureaucracy and government spending. We complain that our tax dollars are all too often wasted, so then politicians begin clamoring for smaller, more efficient government — something we have yet to attain. But because the average voter is a moron, long-term solution to rampant government spending eludes us.

    Private enterprise is the genesis of national wealth, not government. A viable corporation is a profitable corporation. It therefore seems to me that every employee has a stake in maintaining profitability within his or her own company. This isn’t what we see happening, however. The mindset appears to be that if CEOs can reap tens of millions of dollars in bonuses, then why shouldn’t labor also get a bigger piece of the pie? Both instances are counterproductive to the concept of profitability and financial viability.

    Automakers pass their costs (of doing business) on to the consumer. We may wonder why a car or truck costs so much these days, as opposed to their costs twenty years ago. Many Americans are wondering why it is necessary to spend so much for a product that will only last four or five years, is expensive to maintain and operate. Thus, we begin to understand why automakers have so much inventory sitting around just waiting for a buyer, and why manufacturers are suddenly laying people off from their jobs. And, let’s face it . . . people who aren’t working, aren’t buying; this in turn creates even more unemployment. The effects are exponential, and yes . . . depressing.

    In two well-written books (Future Shock, and The Third Wave), Alvin Toffler warned us years ago that we were heading to this point in time. We are in a post-industrial era. We are living in a society where 78% of the GDP falls within the service sector. How stable can our economy be when our primary financial activity centers on selling burgers, doing nails, selling laptops, and selling goods made in China? I guess my point is that no one in this country has fully considered our present (dire) circumstances, nor have they figured out what to do about it. But one thing is certain . . . if people would rather pursue an “all or nothing” attitude about wages and benefits, if management and labor continue to embrace an attitude that it’s either my way or the highway, there will be no long-term solution to our economic conditions, and in fact, it will only get worse. So with the acknowledgment that I “go on far too long,” let me end with these questions. (1) Would it be better for automakers if they created “demand” for cars and trucks by making fewer of them? (2) Would fewer executives and workers be more efficient in the production of automobiles? (3) Would cheaper products produce a greater market share? (4) Do we really trust politicians to “solve” the automotive industry problems?

    Be well, my friend.

  3. Tom says:

    The automotive companies, in my opinion, represent the last segment of the manufacturing sector. Steel, textiles, and the machine tool industries all were large and employed tens of thousands of people. Only the first two have bounced back, but are only shadows of their former selves.

    Where this is important is that our national security depends on these industries. In a time of war or elevated conflict, if we are dependent on foreign suppliers who disagree with our policies, our capacity to wage war or to defend ourselves would be severely crippled. Historically, the cut-off of materials to Japan by the US helped Japan enter World War II.

    In a service-based economy, money just gets passed around for services. Value-adding to products doesn’t happen, and the economy stagnates. It gets worse when money spent on goods made overseas goes overseas and stays there – it doesn’t come back. Think of a leaky radiator and you’ll get the idea.

    Last, do we trust the politicians to solve this problem? That’s a resounding NO!! If you can think of a government program that works efficiently, then let me know. Their track record is abysmal.

  4. LASunsett says:

    //If you can think of a government program that works efficiently, then let me know. //

    Taxes.

    The government is great at collecting them. Which, by the way, is the only government program I qualify for. 🙄

    • Tom says:

      LA – Not really – If the IRS was so efficient, then why do so many nominees for Obama’s cabinet behind in their taxes? ‘Nough said…

  5. LASunsett says:

    Good point Tom, but as we both know they get by with it because of who they are and who they know. They wouldn’t have been caught even yet, had they not sought jobs within the Administration. Just let one of us try it, and we’ll see how long it takes for them to find us and make us pay up.

    Maybe I should rephrase to, “the government is great at collecting taxes from working people that have historically paid the bills in this nation, for years”.

  6. Tom says:

    I can live with the rephrase. 😆

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