Chapter 11 Bankruptcy Should be the Answer for Corporate Stupidity and Shortsightedness

Treasury Secretary Henry Paulson wants us to believe that the sky is falling for American car makers, in addition to our financial industry.  So yesterday, he announced that even though he had assured us he knew exactly what he was doing when he sold us all on the $700 billion bail-out plan before the election, now he needs to put the kibosh on those plans and re-tool.

On top of that, Congress wants to include the auto industry in this whole rescue scenario, rather than have them file for bankruptcy.

Bankruptcy might sound dire -- and granted, it's not really a great choice -- but filing Chapter 11 bankruptcy could actually be a good thing for the auto industry, and Americans wouldn't be left holding the bag for their stupidity and shortsightedness.

Yeah, I said it -- stupidity and shortsightedness.  What else can you say about companies who have put their collective heads in the sand and ignored the demand of consumers for smaller, more fuel efficient cars and who just kept right on producing things like the Expedition (14 miles a gallon) and the Tahoe (also, 14 mpg).

Chapter 11 bankruptcy has one goal -- to help a failing company reorganize, and not go under or close up shop in the process.  No, it's not simple and often it doesn't work out.  But I can't help wondering why we're rushing into the handout scenario when we saw just how marvelously it didn't work for the economy when that was the plan for the financial industry.

Do you know the names Texaco and United Airlines?  They filed for bankruptcy reorganization and today they're still here.  If I'm remembering correctly from my law school days, that's the whole point of Chapter 11 of the Bankruptcy Code -- taking a look at what's not working and finding a way to turn a company around, if possible.  No, it's not easy and there are lots of other things to consider, like the impact on those employed by the car companies.

How can we keep rewarding corporate chiefs who scoff at making more fuel efficient cars that are selling well and who ignore the statistics on what consumers want.  Hey, don't worry -- make bad plans, don't be competitive and produce products that people don't like, and Uncle Sam will be there to help.

Many, many strings had better be attached to any sort of rescue plan that Paulson and others come up with in order to keep the guys in Detroit from thinking that the days still exist where they can dictate to consumers what they should buy and not the other way around.

At the very least, shouldn't the management teams who have brought their companies to this point be kicked out on their keisters before the corporations see a dime of any federal help?

When she's not hanging out her with her MOMocrat pals, you can find Joanne Bamberger at her place, PunditMom, wondering about all sorts of other political stuff!

Comments

[Cara]

I am in absolute agreement with you. As far as the number of people employed by the auto industry, in a piece on NPR last night I heard that the Vegas casino industry employs way more people than the auto makers and the casinos are sure having a difficult time right now with the economy being what it is. Should we bail them out too?

[Sharon]

I also agree with you on this. I wrote my own personal rant earlier today because I do remember when the red flags about fuel efficiency went up in the 1970's. If you want to raise your blood pressure a little higher, watch "Who Killed the Electric Car?"

[Daisy]

We were watching a news story on home foreclosures and lost sympathy for the "poor" family when we realized they were loading their meager belongings into a huge SUV. Dude, sell your car!

[hoppytoddle]

They probably can't get even close to what they owe or bought the thing for. Oh, but that's their fault, too, right?

[Amy@UWM]

Totally.

[Melisa]

The main problem with profitability is that they have insane labor costs compared to foreign auto companies (yes, even ones that manufacture in the US). The UAW doesn't want them to file Chapter 11 because then their contracts would be in major trouble.

GM and co. do make fuel efficient cars and lose money on them every year. The profit machines for these companies are the high profit SUVs that were popular until recently. GM is coming out with an electric car in 2010 and guess what? They will lose money on each one they manufacture in spite of the $40K price tag and $7500 tax credit.

[tiny marie]

Let's sick Barney Frank on them...he made such wise choices in the past.

[ryzun13]

Republicans just amaze me, sure blame Barney Frank for this fiasco instead of the realities of deregulation. Blame the Unions for the mistakes of upper management. Geez.

Do some research for God sakes.

Great post!

[Kellie]

Careful. this started sounded to sound very capitalistic and *gasp* conservative in nature. :) let the company fail on its own dime. don't reward mgmt. agreed! article is great.

I think you missed what the blue side usually states which was nice.

if auto industry files for Ch 11 then what will all of those people in Michigan do? usually Dems are more worried about the social impact of the unemployed rather than the impact of a successful (or not) run company.

Tiny Marie, research does show that the unions have hamstrapped mgmt in to making some decisions they would not otherwise do. Have you read about GM's health policy? Makes me want to work there! ;) But it does cause issues when you are trying for profitability.

blame can be spread everywhere. agree with the post. let them file for Ch 11.

[Kelley Irish43]

Hmmmm--- a little perspective from a Michigan citizen.

First of all Detroit continued to produce the gas guzzlers because--PEOPLE BOUGHT THEM!

I reference this.. "Heavy bodies and gas-guzzling engines have not kept the top three pickups off the list. Ford's F-Series, Chevy's Silverado and DaimlerChrysler's Dodge Ram are on the list, as usual. Consumers may be choosing passenger cars over SUVs with greater frequency, but demand for pickups is still high, demonstrating their utility as work vehicles and the unparalleled variety of configurations in which they are available.(I reference this from 2006 "http://www.msnbc.msn.com/id/14803544/)

American has long had a love affair with cars-they love big bad cars and see them as an extension of themselves-also the crash tests that show the small cars crumpling when hit by the big cars give people a sense of safety in larger cars.

Add to the fact that we make it easy to import cars here while countires across the pond make it expensive beyond measure to buy American-and you can see that there is more at work here than just an out of touch auto industry.

The big three have also negotiated contracts with workers that is more in line with what workers overseas are getting when COL is figured in. (NBC news today)

I guess we can either bail out the auto industry-so people can have jobs and pay the taxes for the bail out. Or--we will need to create a public works progam so all the displaced workers can work. Otherwise we will be using our taxes for welfare.

It is not just the auto wokers themselves that will be without jobs- the people in the factories that supply the parts will lose their jobs, the restaurants that the workers used at noon-will close with no business. The shopping malls will close as people who do not have jobs do not purchase clothing and goods-->then those people also cannot provide for their families. The banks will sufer because now people withpout jobs in an economy where there are no new jobs, will default on their mortgages. The mortgage default will devalue the properties left by the workers who do have jobs. This triggle down effect will reach well past the Michigan borders.

Let's not forget this all began when the Oil companies posted record profits. People had to use money that used to be available to purchase-to simply get to work. Deregulation ment-do whatever you can get away with-and in the short term a few people got really rich. Now the day of reaconing-if people here do not have jobs making money-there will be no one to purchase the ceap omported goods.

I do not work for the auto industry. I am a simple teacher. I do however see how connected the economy is. I aslo see how having no government oversight is akin to sending the kids out to recess without supervision. The economic landscape became ripe for Bullies with no over sight. Time to put some adults back on the playground to make sure everyone plays by the rules. Just my humble opinion.

[hoppytoddle]

KelleyIrish, you are 100% correct. It's not just a bunch of money grubbing executives we are talking about, here. People that have followed or worked even in proximity to the UAW know what the other side of the coin is, here Go watch your Roger & Me, people.

[PunditMom]

But isn't a bail-out a reward for the big car companies who refused to see the writing on the wall?? As sales fell and people wanted more fuel efficient cars, and bought them from other manufacturers, their response wasn't to produce different vehicles, it was to give people money to put gas in their cars as a sort of bonus.

Ch. 11 bankruptcy doesn't mean going out of business -- it's to reorganize. And what incentive will there be to change the way Detroit does things if they get a hand out with no strings attached? It is a delicate balancing act, but I don't think the government should rush to hand over $$ without some SERIOUS conditions.

[Tiny marie]

If Barney Frank and Friends hadn't forced banks to loan to people who had no way of paying it back ( sweet heart deals) we would be in far less trouble.

[The Daft Dem]

Honestly, I am not quite sure where I stand on this yet, as believe it or not there are pros and cons to both sides.

The "cons" are pretty well documented here, so I will not duplicate it. But the other side is completely overlooked.

First, don't compare it to the financial bailout, mostly because that bailout (at least as it was sold to us) was not actually done. Paulson has played games, changed strategies, etc. but never actually fully implemented anything to give the real kickstart, so don't blame that on the auto industry.

Second, remember there are far flung effects of these manufacturers filing chapter 11. Yes, it will hurt workers as it will most certainly lead to efforts to bust up the UAW. Second, how about every other company in this country that is currently a vendor of say GM. GM files chapter 11 bankruptcy and is forgiven debts, what happens now to say Intel (I don't know if they are or aren't a provider... just an example)? So, then you let all of them "go under" for the poor choice of selling to GM... and so on.

The one thing we probably should have learned from the financial district disaster is that you can't wait until the floor has come out from under you before you try to shore things up. If people like Ben Benarke, Ben Stein, David Ramsey had not been downtalking the issues last year, perhaps something could have been done before the wheels completely came off. It could have been done without having to rush into bad ideas. Maybe just maybe we can think through the auto industry and help restore this (with plenty of strings attached) BEFORE the sky starts falling. Because sometimes, chicken little knows what he is talking about.

[kady]

Daft Dem - you are incorrect. Going into Chapter 11 does not mean that all debts are forgiven. There is an immediate freeze on payment but debts get "worked out". And if gov't comes in at the Chapter 11 level as DIP financing (Julie and I talk more about this in our post today) it is likely that creditors to the car companies will come out w/ much of their debt intact (either in the form of cash or ownership in new GM).

You are correct in one thing about the financial bailout - our leaders in Washington were frighteningly dishonest with themselves. Bear Stearns failed in March. Lehman didn't happen until September. That's half a year of time that Washington had to make changes to the system. But "shoring" up in advance of Lehman's failure wouldn't have made a difference. The choice of not propping up Lehman lead to problems in the commercial paper market, something NOONE foresaw. "Shoring" up would have meant putting money in a completely inappropriate place.

But that's the difference between spot solutions (which involves throwing money at the problem) and systemic solutions. A systemic solution would have been, again, to fix our bankruptcy system to deal with (1) counterparty risk, (2) illiquidity, and even (3) frozen credit, all of which are problems when a large financial institution fails.

The most pointless thing you can do is give money to the very same people that got us in this trouble in the first place. Want an example? AIG.

[goedkoopste verzekeringen]

It is interesting report however with few arguments as well. I totally agree with the comments posted by The Daft Dem.