GM’s Chapter 11 filing – who wins and who loses

Friday, June 5, 2009, AM | Leave Comment

First off, the big losers as always are the stockholders. They are simply wiped out, and the value they once held goes to creditors. So the creditors win, whoever and wherever they are. That’s how the American systems of bankruptcy works. Many employees, in tens of thousands, would be laid off. We hear that several thousands of employees are laid off at a company. We seldom think of their lifestyles being wiped out as well. The losers are not just losers, in some cases, they are completely wiped out. When one loses money, there are, obviously, people who win.

Besides the creditors, are there other “kinds” of people on the winning side? I say “kinds”, because there are different kinds of people in this world. Some are blood suckers like vampires, others will wrap their fat and already swollen bellies around you and will slowly suffocate you to your financial death and yet others would tear you apart, of course, financially.

However, the people who are waiting for their manna will be most benefited from the the ordeal of GM bankruptcy. The creditors and debtors are joined by a third set of artful and sly players – the three-piece suits in the apparent form of lawyers, accountants, and financing wizards required to fix, defend, wind down, and restructure a failed company.

Most of these people, of course, bill by the hour. Could this money have been awarded to lower-rank employees who get laid-off as a result. Some examples:

  • Enron – The bankruptcy of Enron generated fees of about $750 million.
  • Lehman Bros – In the first four months of Lehman’s temporary stay in bankruptcy protection, a host of firms requested about $100 million in fees. And the meter is still running. Last fall, experts projected Lehman could generate $1.4 billion in bankruptcy-related fees.
  • General Motors – GM’s bankruptcy is likely to be longer and potentially more contentious than that of Chrysler (short, sweet, a nice bit of business but nothing to make a year). A Bloomberg report from February, via the Huffington Post, suggested that a GM bankruptcy could generate fees of $1.2 billion.

In a Nutshell
The bankruptcy code sets up a hierarchy of the unpaid in which any sums of cash given to those highest on the ladder mean less money for those on the bottom rungs.

That’s good news for some professional services firms that stand to profit. But it’s bad news for bondholders and other investors to whom GM owes money. Every penny spent on shrewd legal advice and high-end accountants is one penny fewer they can recover. Plenty of cash that could be spent repaying creditors will wind up going to pay the bill of the people who prepare the bills.

What do you think?

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