General Motors Bankruptcy Part 2

David Skeel has thoroughly explained why and how the federal government's involvement in the bankruptcies of Chrysler and General Motors diverted funds from one group of creditors--bondholders--to another more politically favored set--unionized employees (abstract here). Warning: the explanation is not for those whose depth of understanding is limned by talk radio; if GM's engineers had been as bright as the government's lawyers, it wouldn't have been in bankruptcy. I previously blogged about such governmental "legal" re-directions of wealth here.

In any event, Louis Woodhill at forbes.com posted a lengthy piece here yesterday that if President Obama "wins a second term, he is probably going to have to bail GM out again." A number of other folks have already criticized Woodhill's piece for focusing on GM's falling share of the U.S. car market. After all, it was GM's foolish pursuit of market share über alles that contributed to its financial collapse. A smaller, leaner GM might be more profitable.

Nonetheless, Woodhill effectively points out the continuing missteps of GM as it attempts to engineer cars that are competitive with those coming from Germany, Japan, and Korea. And without a comparable product, GM will continue to be an automotive also-ran, at least in the U.S. market. As such, there is no way the federal government's massive equity interest will be recouped.

Even if GM runs out of cash, which I think will be unlikely, and needs another trip to bankruptcy court, I am reasonably confident that there won't be another unsecured creditor shakedown. The financial markets have sufficiently recovered since the freeze-up of late 2008 that there won't be a need for a federal line of credit to keep GM's doors open. And without that stranglehold on the reorganization process, the creditors negotiating in light of the Bankruptcy Code will divvy up the GM pie. Of course, that also means that equity--including the federal government's $53+ billion share--will be wiped out forever.

It is certainly the case, as Woodhill concludes, that "during the current campaign, Obama might want to be a little more modest about what he actually achieved by bailing out GM the first time." But don't hold your breath, modesty never won an election.