The Real Difference Between Bankruptcy and Bailout

[tricky]

Robert Reich's Blog

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley. His latest book is "Supercapitalism." This is his personal journal.

Tuesday, November 11, 2008

The Real Difference Between Bankruptcy and Bailout


When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.

The Treasury seems to have lost sight of its real client. It's client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

It would be different if Main Street was getting something out of all this. But credit still isn't flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.

There's more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers' creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.

In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.

And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.

It's not the big guys who need rescuing. It's the small. Right now, the government has its priorities upside down.
http://robertreich.blogspot.com/2008...uptcy-and.html

[PETA]

this makes a lot of sense to me

In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

[Sinner]

Originally Posted by St. Stalin the Apathetic

this makes a lot of sense to me

you just don't understand the situation... they made those house purchases BEFORE all this came out...

[david austin]

the problem with bankruptcy for auto makers is that it destroys confidence

gm isnt a service

its fundamental core is creating a physical asset that in many cases is held by contract that which gm holds

take a look at oldsmobile sales when gm announced they were cutting the line. even with parts and service support the line essentially died the minute the news came out. nowadays how many oldsmobiles do you see on the road? a decade after the line was cut its all but disappeared... no granted the phase out was natural but all products still in the pipeline were destroyed from a sales standpoint basically on consumer confidence. in the face of firesale deals nobody wanted it anyway

its a really tough situation

[tricky]

Originally Posted by david austin

the problem with bankruptcy for auto makers is that it destroys confidence

gm isnt a service

its fundamental core is creating a physical asset that in many cases is held by contract that which gm holds

take a look at oldsmobile sales when gm announced they were cutting the line. even with parts and service support the line essentially died the minute the news came out. nowadays how many oldsmobiles do you see on the road? a decade after the line was cut its all but disappeared... no granted the phase out was natural but all products still in the pipeline were destroyed from a sales standpoint basically on consumer confidence. in the face of firesale deals nobody wanted it anyway

its a really tough situation

Are you confident in Detroit now? We're a little past that point. Everyone knows that Detroit has had its head up its ass for years pushing all these SUV's. It's inevitable that they will have to retool their lines, no point of propping it up.

[david austin]

they have been retooling the lines

for about a year now

we still see a lot of the truck ads here because of regional marketing

gm may have had decades of bad products but they have made some pretty sizable leaps and bounds over the past few years. smaller crossover suvs, midsize cars, fuel efficiency across the board is better

the point is that you cant just shut the lines down... you have to phase them out... which again they have been doing

one of the major issues with this is the union red tape

[tricky]

Originally Posted by david austin

they have been retooling the lines

for about a year now

we still see a lot of the truck ads here because of regional marketing

gm may have had decades of bad products but they have made some pretty sizable leaps and bounds over the past few years. smaller crossover suvs, midsize cars, fuel efficiency across the board is better

the point is that you cant just shut the lines down... you have to phase them out... which again they have been doing

one of the major issues with this is the union red tape

bankruptcy, restructure the contracts.

[david austin]

the confidence is already damaged but its also manageable. gm still teeters between the #1 and #2 spot for auto sales

going into bankruptcy may send enough shock down to the consumer that it may never recover no matter how its restructured

its still working to offload some of its other brands but much like aig... its tough to find a buyer when they are all struggling to make a dollar

[tricky]

Originally Posted by david austin

the confidence is already damaged but its also manageable. gm still teeters between the #1 and #2 spot for auto sales

going into bankruptcy may send enough shock down to the consumer that it may never recover no matter how its restructured

its still working to offload some of its other brands but much like aig... its tough to find a buyer when they are all struggling to make a dollar

Meh, you are too pessimistic of company's opportunities. A fresh start would be a welcome for them. Are we to pay everytime we are worried a company might not make it. Woulda, coulda, shoulda. I don't wanna be on the line everytime one of you financial people gets your panties in a wad worrying about some fucking corporation. Come on, that's not capitalism. They're a HUGE company, where else are people going to get that many cars? It's not like they're gonna turn off the lights and stop making cars if they declare bankruptcy and restructure. If they can't retool, another domestic car company will spring up to replace them.

[david austin]

i dont really have a right or wrong answer

its a tough deal

bankruptcy could lead to devastating confidence that might never return

bailout could lead to money never being paid back

not a good place to be when you have the umbrella they do (1mil+ jobs affected and pension trusts)

[tricky]

Originally Posted by david austin

i dont really have a right or wrong answer

its a tough deal

bankruptcy could lead to devastating confidence that might never return

bailout could lead to money never being paid back

not a good place to be when you have the umbrella they do (1mil+ jobs affected and pension trusts)

fair enough, good thing you're not a senator

[PETA]

shit sandwich vs giant douche

bailout vs chapter 11

meet.....

http://www.pbgc.gov/



take your pick... want to pay for the bail out w/Chapter 11 or do you want to pay for the bail out w/out Chapter 11


which bad options costs less? has less political fallout? has fewer/greater wheels to be greased... all kinds of variables. Just be prepared to bend over regardless of which way the cookie crumbles.