Tuesday's news was dominated by more talk of a Big Three bailout. And despite a turbulent ride the first time they (privately) jetted to Washington, their second trip by road (in modest hybrids, no less) seems to have made action more likely.
Under a still-evolving plan, the government could give out short-term bridge loans totaling $15 billion. These short-term loans will go to GM and Chrysler. Though it's asked for longer-term support, Ford opted out of short-term aid, saying it's healthier than its two competitors. Tied to those loans, the feds would set up and oversee a restructuring plan for the companies and require some yet-to-be determined ownership stake.
Sound familiar? It should. We already have a proven process to handle such cases, but without messy political ties—it's known as Chapter 11 bankruptcy. True, the proposed plan seems to have some of the benefits of an expedited bankruptcy without the associated credit stigma—and maybe that's what's necessary in this case. But problematically, the government will own yet more private sector shares and be heavily involved in any reorganization—they've already indicated they'll monkey with management and "guide" the industry toward a greener future (environmentally green, that is, not money and profits green).
As we've argued before, if the Big Three enter bankruptcy, Chapter 11 reorganization is more likely than complete liquidation under Chapter 7 and more useful than a government bailout. Bankruptcy's not subject to as many political pressures, and unlike any hastily created bureaucratic body headed by a "car czar," the courts have handled corporate bankruptcies smoothly for years. Further, despite what lobbyists and legislators would have you believe, the autos could continue operating under Chapter 11—making the oft-quoted 3 million or more lost jobs vastly overstated.
The major airline bankruptcies earlier this decade provide valuable insight into this process. Many of the major airlines received a federal bailout after 9/11, only to enter bankruptcy further down the road. The airlines are a different beast, but many of the problems faced by the Big Three are similar—lots of debt, dwindling market share, and weighty union contracts. Back then, government bridge loans simply proved a band-aid for a gusher, and there's little reason to think this time's all that different. Government support is likely just delaying the inevitable. And remember, once the airlines entered bankruptcy, they were able to restructure their businesses and eventually emerge to fly another day. (Think Delta or United.)
Although today's proposed deal would be better than a blank check, it seems possible we could repeat past mistakes. Such exercises often end up being more about political pandering than productive repositioning. But unless they're kept afloat by a continuous government cash stream (not likely), the Big Three will have to take their lumps eventually. And whether it happens now or a year from now, the autos' restructuring options limit the likelihood of a Detroit-driven economic calamity.
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