George S May Blog | Who will benefit from the Auto Industry Bailout

"GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.

Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus (Capital Management) that their investment is worthless and they will not be able to use their position of control to improperly benefit." - Source