Financial Stability, + Website

CHAPTER 11 Different Circumstances Require Different Solutions

As Franklin Roosevelt was inaugurated, the banks that served Michigan had failed and the Great Depression had decimated Detroit. The entire country was on its knees. Six decades later, as Bill Clinton took office, the resources of GM’s finance subsidiary, GMAC, needed to be tapped to their limit to fund GM through a crisis following a reported loss of more than $20 billion. As Barack Obama took office in 2009, GM reported a loss of more than $30 billion and the whole world was in a state of equitable insolvency.

Key GM leaders, however, had learned that for the first time in post–World War II history it was possible for GM to restructure under U.S. bankruptcy law. Implementation of TARP by Congress and the Bush Administration gave the U.S. government a stake in large U.S. banks and thus a significant voice in major decisions of the banking system that would be a major voting block for any successful Chapter 11 filing. That meant the government could prevent a calamitous loss to the Pension Benefit Guaranty Corporation by convincing bankers to allow GM and Chrysler a fresh start, making each sufficiently free of prior debts to succeed.

To accelerate the reorganization process, GM hired the legendary New York lawyer Harvey Miller, who succeeded in gaining court approval to sell the U.S. operating assets of Lehman Brothers to Barclays Bank within a week after Lehman filed for bankruptcy protection. A structure similar ...