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  • The Auto Bailout & The Bankruptcy Myth

    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.

    Posted in Economics [slideshow_deploy]

    10 Responses to The Auto Bailout & The Bankruptcy Myth

    1. Eugene Maslov, Leomi says:

      Fool me once – shame on me, fool me twice…. you know, you can'hm fool me twice…

      -"YES WE CAN !!!"

      Hellooo dictatorship. I realized, even if it's a 100% of people disagree with bailing auto crooks out, "people's employees" will do their way.

      Watch it.

    2. Robert Chatham, Hous says:

      BANKRUPTCY is THE ONLY THING that makes sense ! !

      The labor Unions, have destroyed MANY of AMERICAS" Sound Stable Industries, under the ":FLAG" of PROTECTING THE LITLE MAN ! ! !

      When an AMERICAN PRODUCT is OVER PRICED And POORLEY DESIGNED ,, Because of LABOR CONTRACT INTERFERRENCES, Then The American people can WELL EXPECT the FOREIGN GOVERNMENTS of this WORLD to RECOGNIZE THIS FACT, and TAKE OVER ! !

      WHY DO WE WONDER "WAT CAUSED THE AMERICAN COMPANIES TO GO OUT OF THE COUNTRY FOR SO MANY PRODUCTS" ? ? ? ?

      TWO MAJOR MOVEMENTS< THAT ARE "JOINED AT THE HIPS" have been the BASIC CAUSES OF THE START OF AMERICAS' DECLINE. (1) The ENVIROMENTAL RADICAL MOVEMENTS such as "THE SIERRA CLUB< THE AMIMAL RIGHTS GROUPS < AND THE GLOBAL WARMING "FREEKS"

      (None of whom have the "REAL FACTS") ! ! and (2) THE LABOR UNIONS ! !

      This is JUST the TIP OF THE ICEBERG ! ! !

    3. Sharon/Missouri says:

      NO BAIL OUT FOR AUTO INDUSTRY UNLESS WILLING TO MAKE HUGE CONCESSIONS. All backing democrats and look what the democrats did with Freddie and Fannie.

    4. Weber, Ohio says:

      My guess is that we have enough vehicles already in the U.S. that we could not produce or import any for 1 year and still be FINE. Yes people will be laid off for awhile until the Auto manufacturers can match the market demands for type of cars and quantities. (And labor unions to face reality). The answer isn't to get more people to BORROW money to buy a car they don't really need.

      And it really isn't for our government to own parts of these companies that NOW need to take responsibility for not being prepared for market shifts and their own bad decisions.

    5. Pingback: The Auto Bailout & The Bankruptcy Myth | debtdeficit.com

    6. john , Indiana says:

      The situation the big three automakers are in is something I like to call Studebakers revenge. They went broke trying to support the union, and with A little help from the big three they vanished from the face of the earth. Dont get me wrong, I like to support american products, and I buy made in U.S.A. whenever possible, but I dont like organizations that charge dues for protection and support A political organization with my dues that I dont particularly care for. Sounds like the democrats dont it. By the way, If barney Frank has anything to do with the big three bailout, you wont find me buying any more new cars.

    7. Tom, Indiana says:

      There are several problems with chapter 11.

      First can the auto companies even get DIP financing with the credit markets like they are.

      Second will people buy cars (the second largest purchase for most people) from a company in bankruptcy? Sure alternate forms of warranty could be found but people keep cars longer than warranty periods. Also will parts be available in the future at reasonable prices? And last will banks loan on autos that may lose a lot of value if the company goes chapter 7?

      Third, how many other companies will go into bankruptcy due to GM, F, and/or Chrysler going into chapter 11. (These are suppliers that lost receivables.) How many of the suppliers will wind up in chapter 7 instead of 11? Will a supplier going into 7 pull the rug out of GM, F, and/or Chrysler and how will it affect the other companies that build autos?

      There is no doubt the auto companies need some of the things they could get from or that would result from bankruptcy but perhaps the best option for all is doing things in a non-conventional way.

    8. michelle, Indiana says:

      I agree with john on organizations charging dues for protection. Almost sounds like another organization that people had to pay for protection. I just would like to see America become, once again, a great country. Let's stop borrowing money from our own and foreign countries. Let's get in there and fix it ourselves. We're greater than this. At least I hope we are.

    9. Steve in Detroit says:

      While the Big 3 may have brought this financial situation on themselves in some respects, the government had a part in their failure as well. In this respect I think the government should be shelling out lots of cash to the American Auto Companies; by mandating ridiculously stringent fuel economy standards, they have forced them to create vehicles that cannot be supported by the market. While the 35mpg madate due by 2020 hasn't reached it's full effect yet, the cost and investment that is required to meet the standards is incredible! Meeting this standard will require leaps and bounds in materials and powertrain technology. This involves developing more hybrid powertrains, alternative fuel vehicles, and aluminum and carbon fiber intensive vehicles. This all sounds great… and is feasible, but can you afford an aluminum/carbon fiber, lithium ion, hybrid automobile? The cost is extraodinary! If the government is going to require the auto makers to meet ridiculously stringent standards, they need to be willing to shell out major cash to support the expensive research and development projects. As far as the problems that the automakers have brought on themselves, most of them, especially Ford, have been dealing with the issues effectively (and brutally in terms of job/cost cutting) enough to fix the problem themselves. If they can't do it themselves, they deserve to go bankrupt just like any other company.

    10. You actually make it appear really easy with your presentation but I to find this matter to be really something which I feel I would never understand. It kind of feels too complicated and very broad for me. I am having a look forward for your next submit, I’ll attempt to get the grasp of it!

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