Professor: GM Must Confront Financial Challenges Advocates for the nation's automakers are warning that the collapse of General Motors could set off a catastrophic chain reaction in the economy. Douglas Baird, a professor at the University of Chicago Law School, says in order to fix its financial problems, GM needs to confront its challenges head on.
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Professor: GM Must Confront Financial Challenges

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Professor: GM Must Confront Financial Challenges

Professor: GM Must Confront Financial Challenges

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GM officials vigorously deny that they are on the verge of declaring bankruptcy. And that may be as good a sign as any that the company is not doing well. The company may be unable to pay its bills within a few weeks. Douglas Baird is a professor at the University of Chicago Law School, and he joins us now to talk about what bankruptcy might mean for the company. Good morning.

Professor DOUGLAS BAIRD (Law, University of Chicago Law School): Good morning.

SHAPIRO: OK, so if a company like GM declares bankruptcy, what are the consequences of that?

Professor BAIRD: Well, if this were a simpler and smaller company, the consequences are pretty straightforward. The first thing you do is you give the company a new capital structure. And the second thing you do is you give it a little bit of breathing space to figure out its affairs and how to get it's act together.

SHAPIRO: Breathing space sounds like a pretty good thing. What are the negative consequences for a company like GM to declare bankruptcy?

Professor BAIRD: Well, if you have $100 in liabilities chasing $50 in assets, then somebody is not going to get paid in full. And so typically what happens in Chapter 11 is you wipe out the shareholders, and all the creditors get a haircut. In other words they get stock, let's say, that's worth 50 cents on the dollar.

SHAPIRO: Well, big picture, do you think it would be a good or bad thing for a company like GM to declare bankruptcy?

Professor BAIRD: Well, I'm not sure that's the right question. Reality 101 is General Motors has two gigantic problems. First problem is it has obligations it doesn't seem like it's going to able to meet to various creditors, to retirees. Problem number two is that General Motors has had these problems for decades and hasn't been able to sort them out. So why do we think that if we give it a month or two months' breathing space, somehow it's going to magically figure out the solution to its problems?

SHAPIRO: Well, one could also ask why do we think if we give them, you know, billions of dollars from the federal government, they'll be able to sort out their problems?

Professor BAIRD: I don't think they will. The reality is there is nothing about a government bailout or a Chapter 11 that's going to fix the underlying economic problems that a firm faces. If a restaurant serves bad food, no amount of bailing out is going to convert the bad food into good food. And the same thing applies to a car company or any other kind of company.

SHAPIRO: So what advice would you have for the car companies as regards bankruptcy?

Professor BAIRD: I would say, look, the reality that you're in is you can't pay your obligations and you're not selling something people want. And you have to confront those problems directly. And simply talking about a bailout or financing is simply putting off today's problems till tomorrow.

SHAPIRO: That's some tough advice.

Professor BAIRD: Well, you know, again the problem with bankruptcy people is they specialize in tough love.

(Soundbite of laughter)

SHAPIRO: OK, so on the consumer level, if a company like GM goes bankrupt, what happens? Do dealerships shut down? Do people stop buying cars tomorrow?

Professor BAIRD: No, no, no, no. I mean, think of your experience with United Airlines and what happened to your frequent flier miles. Think of the terrible shudder that went down you when Bloomingdale's filed for Chapter 11.

SHAPIRO: It was terrible.

Professor BAIRD: Yeah. The reality is the next day Bloomingdale's was doing fine. United Airlines is doing, too, fine. Basically, modern Chapter 11 is designed so it's transparent to ordinary consumers. It doesn't stop the workers from coming to work, people from buying the cars, the cars from being serviced. In other words, whatever you're going to do, don't get spooked by this idea that if General Motors files for bankruptcy, all of a sudden consumers will stop buying General Motors' cars. The big problem is they've already stopped buying General Motors' cars. If General Motors makes cars people want, people are going to buy them. And whether they're in Chapter 11 or not isn't really the big issue.

SHAPIRO: That being the case, why would GM executives be so adamant that they're not on the verge of bankruptcy?

Professor BAIRD: Well, you want to make sure that bankruptcy doesn't become a self-fulfilling prophecy. Because if I am selling goods to you today, and I fear you may file for bankruptcy, all of a sudden I'd say, wait a second, I don't want to be left holding the bag. I don't want to be left someone who's owed money. So I'm not going to ship you goods. That becomes a self-fulfilling prophecy. That's the happy story about why the General Motors executives are generally worried about bankruptcy.

But the less happy story is the raw fact that typically when we have a bankruptcy, we have this breathing space. It's a come-to-Jesus meeting. And very frequently the management of firms in Chapter 11 get fired. Not because people are doing anything stupid. It's just that they're taking a hard, cold look and ask themselves the question, these people produced this mess, why do we think they're going to be able to solve it?

SHAPIRO: Douglas Baird teaches law at the University of Chicago Law School. Great to talk with you. Thank you.

Professor BAIRD: My pleasure.

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