Academic

Where Should GM File for Bankruptcy?--Skeel

By David Skeel and Bill Stuntz

The most surprising development in the Big 3's campaign for a bailout has been the amount of resistence it's met. Surprising to me, at least. After all the money that's been committed to the financial bailout, I assumed the carmakers would get a sympathetic welcome in Washington. It's encouraging, in my view, that this hasn't happened. The best case for a bailout is a situation where the company simply has a cash flow problem and will be fine if it is given temporary funding. GM's problem isn't cash flow; it's solvency- too much debt and not enough asset value. That's precisely the kind of problem chapter 11 is designed to address.

One of the most intriguing questions is where GM will file for bankruptcy if that's where it ends up. Large companies generally have a variety of filing options. In recent years, most have filed in New York or Delaware, because these are the bankruptcy courts with the most sophisticated judges- judges who handle a lot of big cases. I suspect GM wouldn't follow this pattern. Both the CEO, Rick Wagoner, and the employees may think they'll get a judge more sympathetic to their plight in Detroit. If they file in New York or Delaware, on the other hand, they'll seem to be turning their fortunes over to Wall Street (New York) or corporate America (Delaware). Assuming the bailout falls through, look for Wagoner to portray himself as a champion of employees' interests, and to file the case in Detroit.

Full post as published by Less than the Least on November 18, 2008 (boomark / email).