By Charles Moster

Bankruptcy is not a process that should be feared by the American people – or by General Motors.  Sometimes it acts as a grim reaper.  Sometimes it has the power of the Phoenix allowing failed businesses to rise from their ashes.  But always it is the great equalizer which is precisely what Congress intended.

So why are GM and the country so afraid?  The answer appears to be very straight forward – loss of the company and the attendant jobs.  That’s arguably never a good thing. 

Consequently, in our bailout driven economy, there is much talk of the Treasury, a/k/a Santa Claus, waiting on the scenes for yet another golden delivery.  The great Greek playwrights had a most descriptive word for this process – deus-ex-machina, which means “chariot from the heavens”. 

In all of the amazing Greek dramas or comedies, mere mortals would run afoul of the Gods and get themselves into an intractable jam.  Brilliant playwrights the likes of Aristophones and Euripedes had no answer.  To keep the masses satiated and calm, a great mechanical chariot would descend from the ceiling of the theatre replete with an appropriately empowered and costumed God to resolve the crisis, and always successfully.  That was the power of the dues-ex-machina.

Unfortunately, there is no golden chariot available in a Chapter 11 bankruptcy reorganization.  I say this having been involved in some of the largest failed bankruptcies in the US, ranging from the steel industry to massive real estate conglomerates. 

Simply put, the purpose of Chapter 11 is to allow the honest and viable debtor to reorganize, with major emphasis on the words so noted.  Although there is much displeasure with GM’s management, no one as of yet has called their honesty into question.  The latter is the great concern.

At the heart of Chapter 11 bankruptcy is the legal requirement that the debtor propose a restructuring plan which is viable.  In bankruptcy jargon, according to the courts that means there is a reasonable prospect of a plan which can be successfully approved by the court and creditors.  On either side of this equation hangs the grim reaper and Phoenix, respectively. It’s up to the bankruptcy judge and creditors to make the fateful choice.

GM can make a good case for reorganization under Chapter 11.  But it will take more than a winning argument to persevere.  GM must demonstrate that it is worth saving.  Bottom line, the Chapter 11 bankruptcy process will allow the Debtor to rid itself of non-performing assets, product lines, and the like.  The juggernaut of Chapter 11 will require that labor contracts be adjusted downward so that all creditors have a chance to be paid and the debtor has a glimmer of hope at the end of the survival spectrum. 

But here’s the big question – is there gold at the end of this rainbow?  As a bankruptcy attorney involved in the government’s first TARP-like program to save the ailing U.S. steel industry and the attendant chapter 11’s which followed, I am entitled to weigh in on this issue. 

Bankruptcy was able to save some but not all of the steel factories. Unfortunately, decades and decades of mismanagement, failure to initiate modernization of facilities, and protectionist policies which rendered these steel producers unable to compete in the global market (emphasis on the Japanese steel industry), could not be overcome by the supposed magic of Chapter 11. 

The government lost 100’s and 100’s of millions, the companies reduced debt, and made some attempt to restructure.  It didn’t work.  Our legal system cannot force corporations to adopt more innovative financial models.  The steel industry was a relic of the 19th Century Industrial Revolution and could not reinvent itself.  Many of the same companies re-filed for Chapter 11, had further reductions, and still limp along today. 

Thousands of jobs have been eliminated over the decades and not replaced.  The steel belt is evidence of that – a fossilized relic of what once was.   Entire regions of the country know all about recession as they have been in that condition for decades.

And that is the lesson for General Motors.  I am all for this corporation taking the Chapter 11 leap and let the cards fall where they may.  Bankruptcy is the great equalizer and it is now time to turn its attention to the auto industry.

Please don’t misunderstand.  I am not cruel or callous in my calculation and absolutely want hard workers and their families to avoid hardship.  However, it is up to GM to demonstrate that it can rise from the ashes of horrific decisions and once again be a viable business. 

If it cannot, its divisions should be (and will) be liquidated.  In our competitive free market system, a new automobile industry will emerge from this vortex creating new technologies and viable/lasting employment for American workers.  In such a milieu, I can envision another Bill Gates or Michael Dell ready to launch a 100% non-fossil fuel vehicle that could amaze and capture world markets.  Watch out Toyota!

Moral of the story… the GM debacle has many of the elements of a Greek Tragedy.  However, in this new versions, sans the deus-ex-machina. 

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Charles Moster is Senior Partner of MosterWynne, a full-service Legal Consultancy law firm that helps build businesses.