Morning Bell: Bankruptcy Is Best Way to Save Auto Industry
Conn Carroll /
Last night while marshaling votes for the House’s eventual 237-to-170 vote in favor of nationalizing Detroit, House Majority Leader Steny Hoyer (D-MD) told the Wall Street Journal: “If we do nothing we face the risk that sometime soon there will be no American auto industry.” Hoyer has it exactly backward. A government takeover of the Big Three represents the biggest threat to their long-term existence, while a Chapter 11 restructuring is the best way to ensure the long-term viability of the industry.
- Bankruptcy Does Not Mean Death: The auto nationalization cheerleaders keep claiming bankruptcy proceedings for the Big Three automakers would cause a loss of 3.3 million jobs. This is a completely fictional number that assumes all three automakers would go bankrupt simultaneously and that all three companies would then immediately cease all operations entirely. Both assumptions are completely false. Ford has said repeatedly that it is in better financial shape and does not need taxpayer money. Furthermore, under Chapter 11 any firm that did declare bankruptcy would still be able to operate under the protection of a bankruptcy court. Even if GM filed for Chapter 7 liquidation, their assets would not simply cease to exist. More likely, entire plants and brands would be sold to other competitors who would then continue to operate them. Either way, the industry’s fear-mongering scenario of a 100% contraction of the auto industry would never happen.
- Bankruptcy Is Designed to Resolve Complex Problems: GM and Chrysler are not suffering from a short-term liquidity problem. They are suffering from a long-term structural problem that includes uncompetitive labor costs, a bloated dealership network and a short-term credit crisis. All three of these issues are best addressed through bankruptcy. The Bankruptcy Code has a well-developed and tested body of law to help bankruptcy judges modify existing labor contracts. A bankruptcy judge has significant discretion and power to push the parties toward an agreement that is mutually acceptable, conforms to economic realities and ensures the business is able to return to profitability. Bankruptcy laws also allow firms to reconsider contractual obligations free of state franchise laws, solving the dealership problem. And bankruptcy allows for an automatic stay on all creditor claims, giving GM and Chrysler the time they need to become competitive again.
- Bankruptcy Pulls Politics Out of the Process: In exchange for a $15 billion down payment and the promise of more bailout money in a few months, the auto companies must agree to report to a “car czar” and have their long-term business plans approved by Congress. Do we really trust people like Sen. Chris Dodd (D-CT) and Reps. Jesse Jackson Jr. (D-IL) and Charlie Rangel (D-NY) to put the economic viability of the auto companies ahead of their own short-term political interests? Is there any evidence at all that politicians would even know what would be in the best economic interest of the auto companies?
Making the case for bankruptcy instead of bailout last night, Rep. Dan Lungren (R-CA) told the Washington Post: “Chapter 11 doesn’t mean death and destruction. It means restructuring and rebirth.”
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