Should bankruptcy be the price of bailing out GM?

The Wall Street Journal ran an opinion piece this morning on bailing out GM (and potentially Ford and Chrysler/Cerberus as well) that suggests the price that each company should pay in order to get more government money: The board and senior management should be fired, shareholders should lose their remaining equity, and a Government-appointed receiver should take over. The receiver should tear up contracts with labor, suppliers and dealers, shut plants as needed, and do whatever is necessary in order to return the company to profitability.

That's the definition of Chapter 11 Bankruptcy. So, what the writer is saying is that the price of bailing out GM should be bankruptcy. That argument makes sense, but I question whether a receiver can clean up the mess at GM and turn it back into a viable competitor post-bankruptcy. Let's remember that Cerberus Capital brought in a management "dream team" to turn Chrysler around, and now they're desperately trying to sell the company, in whole or in part. Given the current economy, a move into Chapter 11 reorganization is likely to slide into Chapter 7 liquidation, which would be catastrophic for the U.S. economy.

Even without driving GM into Chapter 7, a receivership could cause other unintended consequences. For example, the Big Three manufacturers won an agreement to turn over responsibility for retiree health benefits to the United Auto Workers, starting in 2010. That will save GM $3 billion a year. However, if the trustee eliminates GM's contributions to the UAW's Voluntary Employee Beneficiary Association fund, the fund will no longer be able to support GM's retirees without taking benefits away from Ford's and Chrysler's retirees. Further, GM's costs will decrease, which will put the company in a much better competitive position vs. Ford and Chrysler. That could drive Ford and Cerberus/Chrysler into bankruptcy. We could end up with three car manufacturers in bankruptcy, not just one.

I think that the best solution is one that nurses GM through this recession, keeping the company going until consumer demand picks up, but with major operational concessions on the part of GM's management and the UAW. The company must replace its Board of Directors. GM needs its own Louis Gerstner, and a new team of senior managers who haven't been innundated with GM's groupthink. GM has got to become the world's best manufacturer of automobiles, not just the biggest, but they won't get there with either the management team or Board of Directors currently in place.