GM's Expensive 'Surgery'

You may have noticed that in its story this morning about a possible "surgical" bankruptcy for GM, the NYT reported that this surgery wouldn't come for free.

The U.S. government might have to loan the automaker as much as $77 billion. That's right. GM has gotten $13.4 billion so far, but bankruptcy could require much more aid.

The additional loans are called "bridge loans" or Debtor In Posession (DIP) loans. And the idea is that the company, even in bankruptcy, needs extra gas in the tank so it can keep going long enough to become profitable again.

I just had a conversation with Jack Williams, the resident scholar at the American Bankruptcy Institute, and a professor at Georgia State University. Here's a quick Q&A.

Q: Has the government ever provided bridge loans like this?

A: It hasn't through bankruptcy directly. But it has through the Small Business Administration. It does that all the time. But you're looking at a major difference in scale.

Q: Does the size of the bridge loan surprise you? A few months ago, people were talking about much smaller numbers, maybe $30 billion.

A: It doesn't surprise me at all. I think what you're dealing with is not a failing enterprise. I think these companies have failed. You're resurrecting them. What you're attempting to do now is resurrect these companies. I think $30 billion would have been the right number in the fall of 2008, but things have gotten worse.

Q: Do you think bankruptcy is a good idea here?

It's something that probably should have been considered and done in October and November. But it's a smart move, and gives us the best chance of success of rehabilitating these companies.

The advantage is that in bankruptcy court you get to hit the reset button. You get to revisit all the relationships with dealers, suppliers, unions, banks, bondholders, stockholders.... you get to pay people in bankruptcy dollars.

Q: You mean, less than real dollars.

A: Yes, 20 cents on the dollar, 30 cents on the dollar, however it works out.

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