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June 3, 2009

CNN Commentary: Jay Westbrook on “What bankruptcy could do for GM”

The following commentary by Professor Jay Westbrook of the University of Texas School of Law appeared on’s commentary page on Monday, June 1, 2009, the day that General Motors filed for bankruptcy protection. Read the piece below or go to:

Commentary: What bankruptcy could do for GM

By Jay Westbrook
Special to CNN

Editor's note: Jay Westbrook is Benno C. Schmidt Chair of Business Law at the University of Texas at Austin. A bankruptcy scholar, he is co-author of “The Law of Debtors and Creditors,” “As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America,” and “The Fragile Middle Class.“ He has served as a consultant to the International Monetary Fund and the World Bank.

AUSTIN, Texas (CNN) -- The screams produced by the Chrysler bankruptcy are nothing compared with the howling that will accompany General Motors' bankruptcy filing as various creditors claim that the case is going too fast and their rights are being trampled.

But rough justice in the interest of speed is a common trade-off in the world of bankruptcy. The real question is whether even Chapter 11 of the bankruptcy law can quickly process a company the size of GM.

Bankruptcy has two central purposes: maximization of value (including community values) and fairness of distribution of that value. The number one job is to preserve the largest possible pie, then to figure out who gets what slice.

Although roughly similar laws exist around the world for liquidation and distribution of dead businesses, the United States is the acknowledged leader in “reorganization” bankruptcy, which seeks to keep a business going whenever possible, both to preserve jobs and to get the most value for creditors. Most businesses, like most of us, are worth a great deal more alive than dead.

Then-CEOs Robert Nardelli of Chrysler and Richard Wagoner of GM told Congress last fall that their companies couldn't survive bankruptcy. That was wrong. On the other hand, it probably is true that neither company could survive a long bankruptcy. Big companies -- and both of these companies are huge -- usually take years to work through Chapter 11, or “reorganization,” which is what we call the kind of bankruptcy that tries to save the business.

The big airlines, for example, like Delta and United, took years to get through the process. But the car companies are different, even with government backing of their warranties, and might well lose the rest of their customers if they do not emerge quickly.

We were told that Chrysler could never get through bankruptcy in 60 to 90 days, but some of us correctly (and publicly) predicted they had an excellent chance to do it because of the government's strong backing. Of course, the legal tangle that Chrysler will leave behind in bankruptcy court will take years to sort out who gets what, but the first bankruptcy job -- trying to save the business -- will be finished soon.

GM is a much more difficult job because it is a much larger and more complex company by orders of magnitude. Until recently, it was the second-largest industrial corporation in the world. But I think it is likely it will emerge quickly from bankruptcy simply because the government is determined that it will.

The creditor howling is nothing new. Creditors trade insults and plead for mercy in every big bankruptcy case, often through the media. They are seeking to get a bigger piece of the pie, and that is entirely understandable. But the truth is that none of the car company creditors is likely to see much money from these cases because these companies are seriously broke.

The creditors' problem is not the law, but the fact that they lent lots of money to a failing company. Sadly, the media howling may have the bad effect of making some creditors, especially the bondholders, make mistakes based on false hope.

The “secured” creditors have howled the loudest. A misleading statement that often appears in the media is that “secured creditors are first in line in bankruptcy,” with the implication that everyone else must stand aside. That's simply not true.

A secured creditor is secured only to the extent of the money it can get for its collateral at a liquidation sale, and liquidation sales are notorious for producing lousy results. (“How much am I bid for a Chrysler SUV factory?”)

It is for just that reason that American bankruptcy laws try to avoid liquidation so that all creditors can benefit from the higher value a business has when it is a “going concern” rather than a corpse.

The shakiness of the “secured” creditors' position makes it surprising to hear rumors that the government will bail out GM's secured creditors. It may be the politicians have been intimidated by all the howling.

Of course, there are also important public interests in bankruptcy. There is a bias in favor of reorganization or going-concern sales in United States law, because that approach saves jobs and avoids reducing whole communities (or in the case of GM, whole regions) to burned-out economic bomb sites, leaving the rest of us to try to help our fellow citizens recover from the blast.

The judges are not encouraged to ignore those public interest factors, nor should they. Sometimes, all of us have to give up something to keep our communities going. That principle has always been part of our bankruptcy laws.

Will Chrysler and GM succeed? They have no better chance than any recovering business, but they will at least have a chance -- and the United States will have a chance to avoid facing the future having lost a fundamental cornerstone of manufacturing: a full-blown auto industry.

The opinions expressed in this commentary are solely those of Jay Westbrook.

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Professor Jay Westbrook

Contact: Kirston Fortune, Assistant Dean for Communications, (512) 471.7330 or