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Bankruptcy? Nope, It's Just Another Bailout.

Posted By Andrew M. Grossman On March 31, 2009 @ 3:14 pm In Economics | Comments Disabled

All bankruptcies are not created equal.

For months, Heritage and other conservatives have counseled that the proper course for an ailing automaker is the same medicine as for any other sick company: the bankruptcy process [1]. All along, industry shills and union activists have pooh-poohed that idea, claiming that bankruptcy filings would be the end of the industry—an argument that’s never made much sense [2].

So it was a welcome surprise to many conservatives to see President Obama, no foe of big-government bailouts, speak in favor of automotive bankruptcies [3]yesterday. The President’s endorsement of the idea, plus government-backed warranties for new car purchasers, puts the lie to claims that the public can’t or won’t accept bankruptcy and that a bankruptcy filing would spook car buyers. Neither argument ever had much evidence [2]behind it, and now they’ve been exposed as hollow—even GM’s leadership has come to accept the bankruptcy option.

Unfortunately, however, that capitulation does not mean an end to the bailouts. President Obama was quite clear that the kind of bankruptcy he envisions is one “with the backing of the U.S. government”—in other words, tens of billions more in loan commitments. The President’s tough medicine is that the automakers may not get the money outside of bankruptcy (though they might) but that they will, in the worst case, get it after filing a single legal form—a bankruptcy petition [4].

In other words, not so tough.

But is this “bankruptcy” really bankruptcy, with all that that entails? Probably not. Call it, instead, “bankruptcy lite [5].” This is bankruptcy stripped of its discipline, its focus, and its restorative effect.

An essential component of a successful reorganization is some measure of urgency: the company is insolvent, prospects are uncertain, and the entire business is at stake. That pressure leads to bold action and results. It forces companies to trim away bloat and concentrate on their core business.

The Obama plan for the automakers eliminates this incentive. Billion in government financing would allow GM or Chrysler to muddle through the bankruptcy process, with enough cash to avoid having to achieve the tough, painful concessions that are needed for long-term viability and success. So sure, they could emerge from bankruptcy in just a few months, perhaps, but they would look an awful lot like they do today. Once again, taxpayers are being asked not just to reward but to subsidize failure.

That’s not bankruptcy. It’s just another bailout.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/03/31/bankruptcy-nope-its-just-another-bailout/

URLs in this post:

[1] the bankruptcy process: http://www.heritage.org/Research/Economy/lm33.cfm

[2] never made much sense: http://www.heritage.org/Research/Economy/wm2165.cfm

[3] speak in favor of automotive bankruptcies : http://blogs.wsj.com/washwire/2009/03/30/obama-remarks-on-us-auto-industry/

[4] bankruptcy petition: http://www.wiwb.uscourts.gov/fillable_forms/VolPetition_B1.pdf

[5] bankruptcy lite: http://www.heritage.org/Research/Regulation/wm2342.cfm

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