There are a lot of questions and uncertainty right now with a lot of people in Detroit because of a possible GM bankruptcy. What I find, however, is that most people have heard the doom and gloom scenarios and haven’t heard the real news. A GM bankruptcy is a real possibility and either way it’s going to mean quite a few job cuts in the area. It’s going to mean a smaller GM and less production from the company. It’s also going to mean lower labor costs, health care costs, and other legacy costs for GM. The government has made it clear that they don’t want GM to fail and are committed to reorganization of the company. What this means is a lean competitive company that is poised for growth in it’s core competencies.

GM will not be the same company that it is today but it will be around. We are not going to see the millions of job losses with a total collapse of the auto industry as the government has too much invested and does not want to see a further increase in unemployment. A reorganization will leave job losses and some temporary pain to the area but it’s like any cost cutting measures or job cuts in challenging times. The cuts and reorganization hurt when they’re made but they make the company stronger and will make the are stronger in the long term. That’s great for Detroit and even better for Detroit real estate.

Uncertainty means low prices for real estate and reorganization means a better economy in the long term and a better real estate market. Everything really comes down to uncertainty with GM. Will they file for chapter 11 bankruptcy or won’t they? How many jobs will they cut? What will happen to the UAW? What will happen to the bond holders? The sooner that we can get these questions answered, one way or another, the market will get better and the overall view of GM and our area will get better. Uncertainty is what kills the market perception.

Here is a post by Robert Salomon before the CEO of GM stepped down and their rhetoric about no bankruptcy at any cost changed. Even when GM was saying that bankruptcy was absolutely not an option, Mr. Salomon was talking about how it wouldn’t be bad for the company to go into chapter 11. Two of the best quotes from his blog are:

It’s no surprise that GM management is strongly advocating an out-of-court solution. After all, an out-of-court solution maximizes their chances of continued employment with GM.

Is it no wonder their thoughts on bankruptcy were so unbending until former CEO Rick Wagoner was ousted?

So, YES, GM could survive bankruptcy, and we needn’t be frightened by the prospects, …no matter how much GM tries to convince us that it would spell the apocalypse.

In the article U.S. Squeezes Auto Creditors on the WSJ they talk about the Government’s thoughts on a pre-packaged bankruptcy and on the UAW union and bond holders strong hesitation for a bankruptcy. This makes sense. In a bankruptcy, the UAW and bondholders will no longer have any bargaining power. They will just be told what they need to do or what they need to accept and it very well may mean an end to the UAW. Probably not what the UAW thinks as a “good idea”.

President Barack Obama’s auto task force, meantime, has made it “crystal clear” that its members think a managed, or “prepackaged,” bankruptcy is GM’s best option, but it is letting GM pursue the out-of-court option for now, said people familiar with the matter.

They also talk about bankruptcy plans to split GM into a “new” GM and an “old” GM. The new GM would have all of the good assets and brands and the old GM would have all of the bad brand names and all of the legacy costs like health care. I think this would split it into a company that can and will succeed (new GM) and a company that is allowed to fail (old GM).

On Politico Live I found an article Geithner appears open to GM bankruptcy that I believe sums up everything very well. The government is not going to let GM fail and is committed to making it succeed with or without bankruptcy.

Treasury Secretary Timothy Geithner on CBS’s “Face the Nation” seems open to the prospect of managed bankruptcy for GM, saying “There’s a range of options that could work.” Pushed, he stresses that even if the company does file, it will not disappear: “We want them to be part of our future.”

Successfully Yours,
Jared Pomranky
Detroit Market Expert

Detroit investment properties

Free Report on Detroit foreclosure investing “how to”