The year 2008 began for me with the knowledge that my employer was going to file for bankruptcy. As an officer I knew that my fiduciary duties would require me to abandon our long time shareholders and lenders. I knew creditors might sue me.
So began the worst and best struggle of my career as we rolled through countless conference calls and enormous meetings full of angry creditors. As we fought and fought to avoid the inevitable, our advisors pushed again and again that bankruptcy was not the end of the world. Most importantly they argued filing sooner best preserved the company as a going concern. But the combination of shame and the desire of the shareholders to play out the refinancing process led to delay in filing.
It was a delay that was almost fatal.
Eventually, we filed the most creative large corporate bankruptcy of 2008. Not only did we file, but negotiated a contingent merger with a competitor and put both companies into a “pre-packaged” bankruptcy. A bankruptcy where the bank and bond lenders agreed to restructure their debt and merge the companies, while also agreeing that all the trade creditors and employees would be paid on time and in full. The courtroom in Wilmington, Delaware was packed with lawyers who had nothing to do with the case but who just wanted to see the first “double pre-pack”. Even the judge congratulated us on a most creative bankruptcy – welcome to bizarro world where everything is the opposite of what you have always believed.
The key to any US bankruptcy reorganization is the debtor in possession (DIP) financing. Most business driven bankruptcies of large public corporations rely on banks lending more money to the business so it can continue operating. In exchange for the court moving the banks all the way up the creditor chain to a first payout position, the banks loan at high interest to the bankrupt. It is the typical way of avoiding liquidation.
Reorganization is the process of a company and its creditors wiping out the equity holders and many of the creditors accepting equity in exchange for their debt. In essence, the creditors become shareholders in a new company that has shed much of its debt and is able to compete in the marketplace. The alternative is liquidation – all the assets of the company are sold and creditors, employees, and trade creditors receive pennies on the dollar. If there is no viable business, if the company is selling buggy whips, then liquidation is the only option. But if there is a viable business, reorganization ultimately yields more for everyone.
But the Great Recession almost destroyed our carefully constructed plan. As we moved through the process to emerge from bankruptcy in September and October of 2008 the credit markets froze. Our DIP lender became nervous and our new post-bankruptcy lenders even more nervous. It was only through the extraordinary efforts of some of our existing bondholders that the deal closed as the financial world collapsed around us.
I went on to work on two more huge corporate bankruptcies as a director and officer, but this time as part of the new team brought into reorganize the companies. Believe me when I say that it is better to be a restructurer than the restructured. Unlike my first experience, these bankruptcies in 2009 were plagued by the complete absence in the market of DIP financing. All the banks and lenders who had been in the DIP financing business had withdrawn from the market. There simply was no outside financing at any price for several months. The only way to save real businesses with real products was to beg and threaten with disaster the existing lenders and force them to loan more money for reorganization or face liquidation. It was a desperate time.
Which brings us to the auto bailouts. Normally, I would strongly advocate the bankrupt companies to simply file and reorganize or liquidate without government interference. No other country in the world has a more efficient bankruptcy process than the United States. Time and time again I saw bankruptcy breath life into a dying company. And if not, then the US bankruptcy process liquidated those companies quickly and efficiently. In almost every other country in the world bankruptcy means liquidation and years of litigation. It is a major competitive advantage for the United States, because the opportunity to reorganize saves jobs, repays creditors, and moves the economy forward.
But because the credit markets in 2009 were completely frozen, DIP financing was unavailable, particularly at the size needed for GM and Chrysler. So, when conservative critics argue that the government should never have intervened and the companies should have reorganized on their own they are either disingenuous or ignorant of the process and the financing markets in 2009. Without DIP financing both GM and Chrysler would have liquidated.
Liquidations would not only have resulted in hundreds of thousands of layoffs at the car companies, but also in many of their suppliers. Conservatives can make a principled argument that liquidation was the right result, but they cannot argue that a private sector driven reorganization was an option. I was in the market at precisely that time working as a director on one of the largest bankruptcies of 2009 – there was no DIP financing for the auto companies.
Can you imagine the dynamics of an auto market in the United States with one domestic manufacturer and perhaps millions of auto and auto related workers on the street unemployed? Certainly none of them would be buying cars. And in a major war could the United States really rely mostly on foreign manufacturers to build tanks, trucks, Humvees, and the other heavy transportation needs of the armed forces? And that assumes that Ford could have survived the chaos that would have ensued upon the liquidation of its two domestic competitors. One of the features of a run on banks or industries is that healthy companies such as Ford can fail in the chaos as consumers and investors flee even healthy companies.
Unless you believe in the liquidation scenario, the auto bailouts were both disgusting and necessary. The challenge for policy makers is to make certain that public policy avoids the same situation in the future. And the problem is Congress has spent its time in ideological battles about whether the bailouts were right or wrong. It has done nothing to make certain the same problem will not rise again. And that is a recipe for history to repeat itself.