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GroupW -> RE: What Kind of Car Did B0 Make You Buy? (11/6/2009 11:23:37 AM)
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quote:
ORIGINAL: tafkam
GM and Chrysler should have been allowed to fail and restructure, the way any other company would....the free market always corrects itself if left alone....
In normal times, I would agree with that. There were, however, some unique factors at play that are worthy of consideration.
What would normally happen in bankruptcy:
- Companies in BK are usually in need of significant cash to continue operating, otherwise they wouldn't be in BK.
- Normally, a firm declares bankrupty, and then banks and other financial firms step in to provide "debtor-in-posession" financing that provides cash to keep operating.
- Essentially, those are loans that step to the front of the line and have first dibs on any cash available to repay debt.
- That kind of financing isn't all that terribly risky and pays a good little rate of return. A number of significacnt financial firms love it.
What was different this time:
- There wasn't a bank in the world capable (given the ongoing mortgage crisis) of taking down a loan that big.
- The syndicated loan market was shut down, so banks were having trouble breaking up big deals into smaller multi-lender packages.
- Banks had stopped lending to other banks, so no individual bank could raise that much cash.
- The securitization market was dead, dead, dead. Banks couldn't involve non-bank investors in pieces of the deal.
Basically, there was no cash available that would allow to firms to keep operating.
The only other option other than operating in bankruptcy was a complete liquidation. That would have been bad.
It made no sense to have two major firms liquidate only because the banks weren't in a position to step in. Essentially, the government stepped in as the lender of last resort. That's not an inappropriate role for the government to play when private mechanisms break down.
I had actually predicted this exact outcome on other forums. Given the size of the jobs at stake, the lack of bank funding for DIP financing, and the potential magnitude of the recession, government involvement here was reasonably foreseeable.
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