Bankruptcy is the best option for the Big 3 auto manufacturers and law professor Todd Zywicki explains why in a Wall Street Journal column. He argues that management, labor, and politicians each oppose bankruptcy for all the wrong reasons.
The heart of Zywicki's brief is this:
Chapter 11 exists to allow [a corporation] to continue in business while reorganizing. Reorganization arose in the late 19th century when creditors of railroads unable to meet their debt obligations threatened to tear up their tracks, melt them down, and sell the steel as scrap. But innovative judges, lawyers and businessmen recognized that creditors would collect more if they all agreed to reduce their claims and keep the railroads running and producing revenues to pay them off. The same logic animates Chapter 11 today.
General Motors [is] ... in need of reorganization not liquidation. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well. Bankruptcy provides an opportunity to do all that. Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.
So why do the Detroit Three managements and the UAW insist that "bankruptcy is not an option"? Perhaps because of the pain that would be inflicted upon both.
The bankruptcy code places severe limitations on the compensation that can be paid to a manager unless there is a "bona fide job offer from another business at the same or greater rate of compensation." Given the dismal performance of the Detroit Three in recent years, it seems unlikely that their senior management will be highly coveted on the open market. Incumbent management is also likely to find its prospects for continued employment less-secure.
Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules....
Those Washington politicians who repeat the mantra that "bankruptcy is not an option" probably do so because they want to use free taxpayer money to bribe Detroit into manufacturing the green cars favored by Nancy Pelosi and Harry Reid, rather than those cars American consumers want to buy. A Chapter 11 filing would remove these politicians' leverage, thus explaining their desperation to avoid a bankruptcy.
So, if Zywicki is correct, management doesn't want bankruptcy because it will limit their compensation. Labor doesn't want bankruptcy because they'll be forced to renegotiate their ridiculous work rules and their lucrative benefit packages. Politicians, particularly Democrats, don't want bankruptcy because they're in bed with labor and because they see a bailout as providing a lever to force auto makers to make the cars they want rather than what the American car buyer wants.
Sounds to me like bankruptcy has a lot to recommend it.
RLC
