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  • Chapter 11 Bankruptcy Was Invented for GM

    Bankruptcy expert and George Mason University School of Law professor Todd Zywicki makes a concise case for why GM must enter bankruptcy before the federal government gets involved:

    GM (or the others, but I’ll use GM to illustrate the point) presents an unusually good case for Chapter 11 reorganization. GM is, in fact, the textbook example of what Chapter 11 was invented to do. GM almost certainly will not liquidate, and if it does, then this will almost certainly be beneficial from a social perspective because it will illustrate that the resources are better deployed elsewhere in the economy.

    The basic idea of a financially failed enterprise is that there are economic rents or “going-concern surplus” from the current deployment of assets. The idea of a Chapter 11 reorganization is to preserve this going-concern surplus or economic rents.

    GM is a classic example of a firm that looks like a financially failed rather than economically failed. We have both physical capital and human capital with high firm and industry-specific value, namely factories and uniniozed work forces, which value would be lost if those assets were redeployed. It also has at least some going-concern value in its goodwill and namebrands.

    What GM needs to do is shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. It appears to need new management as well. Bankruptcy gives them the opportunity to do all that.

    So GM will almost certainly reorganize, as will the other car companies. GM does not look like an economically-failed typewriter manufacturer at this point, but rather a financially-failed company that needs to reorganize and go forward.

    Posted in Economics [slideshow_deploy]

    4 Responses to Chapter 11 Bankruptcy Was Invented for GM

    1. Pingback: Chapter 11 Bankruptcy Was Invented for GM « Conservative Thoughts and Profundity

    2. Pingback: Chapter 11 Bankruptcy Was Invented for GM » The Foundry | debtdeficit.com

    3. David De Lones, Dove says:

      BANKRUPTCY pkg FOR THE BIG THREE…gulfstream jets crashed in a tree…..ride the flex fuel cars to DC. a poet whom knows it!!!!DLD

    4. JP, Minneapolis, MN says:

      This is another example of the blind leading the blind. Liberals think that throwing money at a problem makes them go away. This solves nothing. It is like parents buying their spoiled kids something just to shut them up. No lessons learned here. I am sick and tired of my government. We have no future with narrow-minded governments like ours. It's time for a change. I do not hear solid reasoning being used for any of the bailouts.

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