In the next 48 hours, Chrysler is expected to file for bankruptcy because, according to press reports, a significant minority of its creditors object to the Obama administration’s planned takeover in which the government and unions would own a majority stake. The Obama administration hopes to persuade the court to ratify and rubber-stamp its plan. But the bankruptcy courts should exercise independent judgment instead, as they do in any typical bankruptcy case.
The expected Chapter 11 bankruptcy filing of Chrysler LLC is an action that probably should have happened months ago. It could have spared all involved the chaos of the ”political bankruptcy” we have seen unfold. The process of a judicial bankruptcy will bring a needed check to the Obama administration reorganization plan that heavily favors unions, at the expense of bond and debt holders.
The hedge funds that refused to be strong-armed into the Obama plan should not be blamed for asserting the interests of the investors they represent; investors that could include pension funds that serve middle-class families. The bankruptcy court should be allowed to be impartial and not be pressured to automatically take the plan offered by the Obama team. It should weigh the interests of all involved, using Chapter 11 precedent, and decide accordingly what each party is entitled to, as bankruptcy courts normally do.
The merger of Chrysler and Fiat the government has pushed is pure “industrial policy” of the type that led to stagnation in Japan and other nations where it has been practice. It may not be the most viable choice for Chrysler to specialize in smaller cars. Rather, a merger combination between Chrysler and General Motors with a concentration on larger vehicles such as SUVs may be the best option. This alliance had been discussed for years but was shelved because of concerns it might run afoul of antitrust laws.
The Obama administration should lift any antitrust barriers to effective reorganization — and suspend planned increases in the Corporate Average Fuel Economy standards that would be detrimental to Chrysler and other carmakers – but otherwise stay neutral as to the form the reorganization takes.
The relatively smooth process of recent large Chapter 11 bankruptcies, such as that of mall owner General Growth Properties, shows that far from being “disorderly,” judicial bankruptcies are far more orderly than taxpayer bailouts in unwinding and reorganizing insolvent companies. The judicial bankruptcy process should be given a chance to work in the case of Chrysler and any other companies that follow suit.
See also, my article in the American Spectator comparing the bankruptcy of General Growth Properties to that of the automakers.
The ouster of General Motors CEO Rick Wagnoner by the Obama administration isn’t the first time in the recent history of bailouts that the government has forced out a CEO. That first happened in September when Bush admnistration Treasury Secretary Henry Paulson forced out American International Group CEO Robert Willumstad in favor of Paulson’s friend Edward Liddy.
The lesson from AIG is that replacing a CEO is no panacea. There is no love lost for the poor managment of Rick Wagoner. He is the one who went to the government hat in hand, and when the government is paying the piper, it can call the tune. But replacing him won’t solve GM’s long-term problems of too many brands of autos and too large of a workforce. And it is increasingly clear that the bailout itself is an impediment to effective restructuring.
The prospect of an ever-increasing supply of tax dollars is leading parties with auto industry contracts — unions, bondholders, dealers and others — to play a game of chicken. No one wants to renegotiate a contract when they think the government will come in with more money to cover the losses. And the Obama administration, as with AIG, does not have the power of a bankruptcy court to discharge debt.
Allowing the companies to go into bankruptcy is what should have been done from the start. As with multiple businesses such as airlines that have succesfully emerged from Chapter 11 bankruptcy, debts could be discharged and the companies could be restructured in bankruptcy court.
To say that consumers would be discouraged at buying a car in bankruptcy misses the point. Consumers might be more likely to buy a car from a company restructured by a bankruptcy court, as they buy tickets from once-bankrupt airlines, than to buy a vehicle from zombie companies dependent on the next government bailout. This delay likely hurts “satellite” companies like auto parts makers more than a bankruptcy would.
In the meantime, the government should lift antitrust barriers and leave all options on the table for mergers. The merger with Chrysler and Fiat that the government is encouraging may not be the most effective. GM and Chrysler had long considered merging, but may have been blocked because the combined company would be deemed by antitrust regulators to have too large a share of the “light truck” market, never mind that this market itself is shrinking. Given the precarious state of the companies, they should be given a blanket antitrust waiver to make the combinations they deem best for their viability.
The government should also delay the imposition of the recently announced increase in Corporate Average Fuel Economy standards. This flawed mandate that adds costs and reduces choices even in a good economy, could be a lethal blow in times such as these.
Let’s drop both the auto bailouts and the mandates. The American auto industy, which has produced such wonderful innovations for so many decades, is too important to be “saved” by Washington’s central planners.”
If there’s one provision in the GM/Chrysler bailout that I just don’t get, it’s the suggestion that the automakers must be financially viable by March 31st next year or they will have to repay the loans.
Unless I’m missing something, if you’re not financially viable, repaying $17.4 billion will be just a tad difficult. This will presumably force those automakers into Chapter 11, which is what the bailout was meant to avoid, at least partly to avoid the “ripple effect” that the much more responsible Ford is worried about. In these market conditions, it is hard to see any way that the companies can meet that condition without engaging in some sort of fire sale (which will in turn have ripple effects).
It therefore looks like, rather than some pre-packaged bankruptcy, the Bush administration has handed its successor a pre-packaged crisis. On April Fools’ Day, of all days, President Obama will be forced to extend the loans, provide more funds or otherwise cave to GM/Chrysler/UAW demands.
However you look at it, this is not responsible government. This bailout beggars belief.
(A further post will provide details of what sort of non-financial bailout could help).
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