When I think of bankruptcy I think of this. That’s right, the Monopoly Guy. Pockets empty. Shoulders shrugged. Game over. All the jobs will be wiped off the face of this earth and bulldozers will tear down the buildings. I’m guessing a lot of people think this way when they hear this word.
Rich Wagoner, Chief Operating Officer of General Motors, seems to think this way. He recently declared that, “We are convinced the consequences of a bankruptcy would be dire and extend far beyond General Motors and therefore we are going to take every action we possibly can to avoid it.”
The primary action that has been discussed to avoid bankruptcy by Detroit’s Big Three (GM, Ford and Chrysler) as well as politicians has been a taxpayer-sponsored bailout. Barney Frank could soon introduce legislation that amends the $700 billion bailout package to carve out some money for the auto industry and frighteningly gives the government ownership stake in the Big Three car companies:
Frank’s legislation would carve out a portion of the $700 billion financial rescue program for the Big Three automakers, letting the government take an equity stake in them in exchange for the loans. Auto executives, labor leaders and other industry proponents are mounting an intense lobbying effort for a bailout. They want an immediate $25 billion loan to keep the companies operating and a separate $25 billion to help cover future health care obligations for retirees and their dependents.”
An alternative option discussed is to give less money in loands to get Republicans on board. But are these really the best options available? Let’s revisit that scary word “bankruptcy.” If GM and Chrysler (Ford under any reasonable circumstances is viable through 2009) were to file for a Chapter 11 bankruptcy, what would that mean?
A case filed under chapter 11 of the bankruptcy code is commonly referred to as a reorganization bankruptcy because it allows companies do to exactly that. Heritage’s Senior Legal Policy Analyst Andrew Grossman explains that “reorganization would put the automakers on a sustainable course. Key are labor costs: Gold-plated salaries and benefits packages for union workers mean the automakers lose a bundle on most cars sold. There’s no incentive to renegotiate when government dollars to pay those contracts are a real possibility. With a bankruptcy judge’s approval, collective bargaining agreements can be reformed to fit economic realities.”
The U.S. Courts does a great job discussing what a Chapter 11 bankruptcy is in its Bankruptcy Basics Website. It discusses how a Chapter 11 works, who can file, what it means for equity security holders, etc. They also note that Chapter 11 is the most flexible of all the chapters of bankruptcy, which would certainly prove useful in this situation.
Instead of thinking of bankruptcy as the sullen, down-on-his-life Monopoly Guy, perhaps we should think about it as starting a new game. And instead of taking a chance on a bailout by dipping into the taxpayers’ community chest, maybe these auto companies would be better off going bankrupt in order to restructure after years or poor business decisions.
For more on bankruptcy, see Grossman’s new paper: Automakers Need Bankruptcy, Not Bailout.