Chapter 11 Bankruptcy Was Invented for GM

Bankruptcy expert and George Mason University School of Law professor Todd Zywicki makes a concise case for why GM must enter bankruptcy before the federal government gets involved:

GM (or the others, but I’ll use GM to illustrate the point) presents an unusually good case for Chapter 11 reorganization. GM is, in fact, the textbook example of what Chapter 11 was invented to do. GM almost certainly will not liquidate, and if it does, then this will almost certainly be beneficial from a social perspective because it will illustrate that the resources are better deployed elsewhere in the economy.

The basic idea of a financially failed enterprise is that there are economic rents or “going-concern surplus” from the current deployment of assets. The idea of a Chapter 11 reorganization is to preserve this going-concern surplus or economic rents.

GM is a classic example of a firm that looks like a financially failed rather than economically failed. We have both physical capital and human capital with high firm and industry-specific value, namely factories and uniniozed work forces, which value would be lost if those assets were redeployed. It also has at least some going-concern value in its goodwill and namebrands.

What GM needs to do is shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. It appears to need new management as well. Bankruptcy gives them the opportunity to do all that.

So GM will almost certainly reorganize, as will the other car companies. GM does not look like an economically-failed typewriter manufacturer at this point, but rather a financially-failed company that needs to reorganize and go forward.

Found on The Heritage Foundry.

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