Thomas Oliver recently penned a piece for the Atlanta Journal Constitution in which he referred to my post Notable Bankruptcies of 2008. In The Year of Bankruptcy Mr. Oliver notes:

It has to happen. As painful as it is.

And there is no magic wand or legislative action or Federal Reserve printing press that can make it all right.

The laws of economics are stronger than any policy…

And so the deleveraging, or debt reduction, of the American economy continues…

Twenty years of excess leveraging can’t be worked out of the system in a normal recession…

I could not agree more with Mr. Oliver. As I explained in my post, I fully expect business bankruptcy filings to increase in 2009. Bankruptcies will likely increase to around 55,000. And as I expressed to Mr. Oliver, I would not be surprised to see bankruptcies surprise to the upside.

As with banks and financial institutions, for many firms in the broader economy, it’s not just a liquidity problem. It’s a solvency problem. Firms borrowed excessively, and at rates that were too cheap – not reflective of their inherent risk. All was fine as long as they were able to refinance the debt, and delay the day of reckoning.

But then the party ended.

We can analyze the situation and pretend that the problem affecting many of these firms is the lack of available credit; or, we can recognize the reality that, for many, their business strategies have serious flaws. I look at firms like Sirius XM (see So Long Sirius), Circuit City, Trump Entertainment, and Bearingpoint (among others) and can only conclude that these are not good firms suffering from unfortunate short-term liquidity problems. Rather, they are poorly managed firms in incredibly competitive markets. This makes their overall value propositions, market positions – or both – extremely unattractive.

Those are problems of the more permanent kind.

Today GM and Chrysler provided interim plans to the US Government in hopes of receiving additional aid (see GM and Chrysler Seek More Aid or GM and Chrysler Release Plans). According to reports, Chrysler is seeking an additional $5B in aid, while GM is currently asking for $16.6B.

You can read a copy of their respective plans here:

GM Restructuring Plan

Chrysler Restructuring Plan

I was impressed with GM’s offering. Truthfully, I expected far less. GM’s plan reads as if management believes it has something left to fight for: The plan is detailed, carefully constructed, and thoughtful. Certainly, GM faces significant hurdles in the form of the UAW, and its bondholders. In addition, the jury is out on whether current management deserves to remain in place. But that said, based on this proposal, I would be inclined to support some additional aid package for GM, …but with more strict provisions (see my previous posts Pre-Packaged Bankruptcy and Preventing Moral Hazard for details).

As for Chrysler, I am inclined to agree with Calculated Risk on this one. Chrysler’s plan is a sham. Chrysler is toast, and Cerberus knows it. Based on this plan, I see the likelihood of the US Government providing additional aid for Chrysler as remote. I would be shocked if the US Government were to continue to put taxpayer money at risk to prop up Cerberus, and its failed enterprise (see Aid for Chrysler? Just say No! and Is the End Nigh for Chrysler? for details).

But now that Chrysler and GM have submitted their plans, the real work for Team Obama begins here…

Several sources are reporting that Sirius XM Radio is on the precipice (see Sirius XM Prepares for Bankruptcy or Satellite Radio a Bad Business Model). This is not surprising news, as both Sirius and XM had been on the ropes predating their merger. As the New York Times reports:

Sirius XM…has hired advisers to prepare for a possible bankruptcy filing, people involved in the process said.

Sirius XM, which never turned a profit when both companies were independent, is laden with $3.25 billion in debt. Its business model has been dependent, in part, on the ability to roll over its enormous debts…at low rates for the foreseeable future until it could turn a profit.

MY COMMENT: Excessive debt was not unique to Sirius XM. It is an economy-wide epidemic. Expect to see many more bankruptcy stories with a similar plot as the year goes on (see my posts Notable Bankruptcies or Corporate Defaults).

Sirius XM hired Joseph A. Bondi of Alvarez & Marsal and Mark J. Thompson, a bankruptcy lawyer with Simpson, Thacher & Bartlett, to help prepare a Chapter 11 filing, these people said.

Documents and analysis are close to completion and a filing could come in days, according to a person familiar with the matter.

According to MarketWatch:

Sirius XM Radio, which reportedly is on the verge of declaring bankruptcy, has problems that go far beyond the dismal state of the economy.

The idea of charging consumers a modest fee in return for superior programming and sterling reception quality may not be viable. Perhaps the industry’s entire business model was flawed from the start and the nation had to experience this devastating recession before people reached that conclusion.

The Wall Street Journal reported on Wednesday that satellite mogul Charles Ergen of Dish Network Corp. has offered to restructure Sirius’ debt and inject several hundreds of millions of funding into the company if it will yield control to him.

I’ve blogged about Sirius Satellite Radio on several occasions (see Sirius-XM Merger, Sirius-XM Merger Update, or Lessons for Sirius for background). It was my opinion that the deal made a great deal of strategic sense. I wrote:

…there are some real cost saving opportunities to this merger. The synergies are real and tangible. Not only do the firms have the ability to economize on administrative costs (e.g., why do we need two sets of management to run these firms), but there are some obvious synergies in production (e.g., why do we need two sets of alternative rock stations when one will suffice).

…it [also] adds value for customers. Exclusivity contracts negotiated by these separate firms locked-in consumers. For example, fans of Major League Baseball were forced to choose XM while fans of Howard Stern only had Sirius as an option. Combining the firms allows fans of both to resolve issues of which service to choose…consumers who have chosen to wait for the uncertainty to resolve over which service would become the standard because they did not like having to choose between two options that are second-best (e.g., I want both Howard Stern and MLB, but I won’t choose until things get resolved) will no longer have to agonize over the decision of which service to select. With Sirius and XM merged…more consumers will likely opt for satellite radio.

Irrespective of today’s news, I still believe the deal makes sense, for as independent entities, Sirius and XM would be far worse off.

In addition, I argued at the time that the DOJ and the FCC were barking up the wrong tree by trying to prevent their union on the grounds that the deal was anti-competitive.

…they [Sirius/XM] do face substantial competition, not in the form of competitors in their existing space, but in the form of substitutes. They face threats from HD radio, traditional radio, iPod connectivity, internet streaming, etc. So this…will put a ceiling on their pricing power.

The initial DOJ and FCC objections now seem misguided, as Sirius XM certainly was not able to flex its pricing muscle, especially in a market in which consumers have a bevy of alternatives, in an economy mired in recession, and in an environment in which auto sales have fallen off a cliff.

Despite all its difficulties, I still believe that Sirius XM has a fighting chance. But the road ahead will not be an easy one, even with a debt reset. Sirius XM still faces the daunting task of convincing consumers that it offers a fairly priced service that provides value vis-a-vis its competitors. And as the MarketWatch article aptly concludes:

Hopefully Ergen — or someone else — can find a miracle cure for an industry that threatens to vanish right before our eyes.

Several sources reported yesterday that GM and Chrysler intend to make a fresh set of buyout offers to their union employees (see GM, Chrysler Set New Buyouts). They plan to offer packages valued at around $50,000-$100,000 per employee. According to analysts, this action allows GM and Chrysler to circumvent rigid union rules regarding layoffs, and provides the firms a relatively quick way to lower overall compensation costs (replacing expensive, experienced union employees with cheaper, inexperienced employees at the reduced rate of $14 per hour).

Here’s what I don’t understand: Why should GM and Chrysler use money loaned by the U.S. Government to transfer wealth from U.S. taxpayers to exiting GM/Chrysler employees? It’s one thing if a firm does that with the capital of its private shareholders, but quite another if they use public money toward that end.

Granted, UAW employees at GM and Chrysler earn far less than your typical investment bank executive, but I’m not so sure paying those employees an exit bonus is, in principle, different than John Thain paying bonuses to exiting Merrill employees in advance of its acquisition by Bank of America.

As a condition for receiving funds from the U.S. Government, GM and Chrysler are required to produce a plan detailing how they intend to pay back those loans, and ultimately, achieve profitability. In my opinion, there are more effective ways to reduce labor costs and preserve capital than to take U.S. taxpayer money and funnel it to employees: It’s through good old fashioned layoffs, of the uncompensated kind. Most other firms have them. GM and Chrysler should be no exception.

The UAW, and by implication GM and Chrysler management, just don’t get it. The alternative to buyouts is bankruptcy followed by layoffs. In bankruptcy, the automakers could effectively repudiate the terms of their UAW contracts and fire just about anyone without consequence. The UAW (and GM/Chrysler management) should become wise to this alternative, and become more willing to consider layoffs instead of buyouts.

As I watch this episode play out, it is becoming increasingly clear to me that the best remaining option for the U.S. Government is to call its loans in March and allow GM and Chrysler to declare bankruptcy. The U.S. Government could step in ex post to provide DIP financing for GM, …but not for Chrysler (see Pre-Packaged Bankruptcy, Preventing Moral Hazard, and Aid for Chrysler? Just say No! for background on my position on the GM versus Chrysler debate). Although I was initially supportive of offering government aid to GM (though not for Chrysler), the aid was not accompanied by provisions necessary to stave off disaster. At this point then, I believe bankruptcy offers the last best chance to salvage GM, and the U.S. auto industry.

Bankruptcy protection would allow GM (and potentially Chrysler, provided it can find financing) to more quickly and efficiently streamline operations. It provides the degrees of freedom necessary to shutter plants, rationalize brands, layoff redundant employees, and reduce the number of dealerships. More importantly, it would once and for all allow for the wholesale sacking of management – a management seemingly insistent on squandering taxpayer resources.