Bankruptcy vs. Bailout: Which is Really Better for the Taxpayer

Where does it end? Honestly, where do we draw the line? I have come to terms with not being a bank holding company, thereby being denied a bite of the $700 billion bailout. I can live with that. Like most Americans, including every small business owner I know, I can live with having to stand on my own two feet. I can live with being responsible for my decisions and my actions and I can live with the consequences of those actions. I am not saying it is always easy and I am not saying that a little help now and then when things are tough isn't appreciated. All I am saying is that this is what it means to be a responsible adult. That is what my parents taught me and that is what I am teaching to my kids.

Pity our society is not echoing such lessons.

Take, for example, the Big Three Automakers. Since Bush's Treasury Secretary, working closely with the Pelosi/Reid/Dodd/Frank Congress opened the money spigots earlier this year, all sorts of companies have gotten in line for their cut, including the automakers. Why? Because they are on the verge of bankruptcy and they want to be rescued. Congress has already promised them $25 billion, but the question is whether the automakers and the public would be better served with congressional oversight of GM, Ford and Chrysler, or with the judicial oversight that would come with bankruptcy.

Chapter Eleven is Not the End of the World

The implicit message coming from the pro-bailout crowd is that if the automakers are allowed to go into bankruptcy, they would vanish from the world, throwing hundreds of thousands of people out of work, sending the economy into a tailspin and throwing us into a new Great Depression. The only dire consequences we have not had to listen to include blood, frogs, gnats, flies, diseased livestock, boils, hail, locust, darkness and the death of the firstborn; but wait, there is still time.

What would happen if the automakers filed for bankruptcy?

There are two kinds of bankruptcy the Big Three could consider, Chapter 11 and Chapter 7. If the automaker in question, say, General Motors, actually wants to stay in business, they would opt for Chapter 11. This would reorganize their business in an effort to become profitable again. Day-to-day operations would continue, however management would have to seek court approval for major business decisions through a committee of court-appointed trustees. With Chapter 11, contracts, assets, liabilities—everything—is on the table and the goal is to restructure the company so that it can go forward once it emerges from bankruptcy.

On the other hand, if GM simply wished to pull the plug and cease to exist, then it would file Chapter 7 and a trustee would be appointed to liquidate the company's assets to pay off as much of the debt as possible, which may include debts to creditors and investors. Chapter 7 bankruptcy is usually an option only when the business has no future, it has no substantial assets or qualities that cannot be reproduced after bankruptcy, or the debts are so overwhelming that restructuring them is not feasible.

Clearly, these companies have a substantial number of assets, a future, and their debt does not preclude restructuring into something leaner, healthier and more competitive. The fact that the overseas sections of these companies usually do very well when the overall economy is healthy is very telling. The fact that American plants not associated with the Big Three, like Honda, also do well, leads us back to the center of the American Auto Industry, Detroit.

This is Not a Problem You Can Solve With Money

As much as I hate to say this, the problems facing the Big Three are not external, like the collapse of mortgage-backed securities or competition from some new company that can produce autos at much lower prices. No, the problem with Ford, GM and Chrysler is the same problem that drove Studebaker to Canada and many other fine automakers out of business. The problem is labor and weak management.

For a long time, the United Auto Workers have had the automakers over the proverbial barrel, and with an average hourly salary of $73.20, it shows. Throw in health benefits, retirement benefits, surviving spouse benefits and everything else the Union has been able to finagle or strong arm out of the self-serving, strike-fearful, top-heavy management of the automakers and you have to wonder how these companies stayed in business this long.

Throwing money at this situation will only perpetuate the existing problems, not solve them. $25 billion dollars is 25 billion reasons to keep things as they are. Sure, Congress might put a couple of strings on the money, like demanding new CAFE standards or vehicle design changes that would turn my HHR into a large, luxury vehicle, but unless the underlying problems of the automakers are addressed, including the weak management and the impossible burden imposed on the companies by insane union contracts, the automakers will be back for another $25 billion before you know it. You would imagine that people smart enough to get where they are in Washington would understand these things, but why are still pushing for the bailout anyway?

The Case Against Bailing Out Detroit

Politics, politics and more politics. That is the only real explanation. By giving the automakers this money, Congress can do two things: It can take a level of control over the automakers themselves and pressure them to build the kind of cars that they and their radical environmentalist supporters think best and it can payback the unions, which may be an even more important thing than greening the nation's fleet of passenger vehicles.

Once the bankrupt automakers are in the hands of a judge, then the unions will have to do something inconceivable: accept less money, less benefits and in all sorts of other ways come down to where the rest of us are. The alternative would be the removal of the UAW, leaving the auto workers at the Big Three scrounging out an existence at Honda and Toyota pay rates, which run about $48.00 per hour and are still $20 per hour higher than the wages of the average hourly worker. More than that, the management of these lumbering, corporate throwbacks will have to change the way they do business on every level, no longer relying on their inherited dominance in the marketplace and actually working to earn the business of the American people, something that they cannot do now while under the thumb of Big Labor.

These are changes that could be imposed upon the industry by a bankruptcy judge, changes that folks in Congress with big political bills to pay and the incoming administration, which wants to increase the amount to $50 billion, are trying to stop by offering this bailout.

The Bottom Line

With no oversight, we have already seen recipients of Paulson's bailout behaving badly, not using the money as intended. We have seen foreign banks step in line for a piece and we have seen companies change their businesses into bank holding companies to get some. The stock market has seen historic declines, unemployment is on the rise, credit is tight and now Paulson is changing the rules on how the money is to be spent. Why would he do that? Because it isn't working and rather than admit it and shut off the money spigot, he is trying to finesse the problem. There is $60 billion left unspent already and the clamoring crowd wants more. It's like the little chickens at some petting zoo when a little kid has food for them—it's a mob and the Congress wants more. They have political ends to meet, not fiscal ones. They have donors to pay back, not citizens to protect.

I think we have spent enough tax money on this ideological boondoggle and I think it is time for it to stop. I think it is time to recall the money the Wall Street firms are using for end of year bonuses and AIG is using for executive holidays; the money the banks are spending on T-bills rather than loans, the money they are using to buy-up their weaker competition. It is time for the politicians to get out of this and stop trying to use this mess to their personal or party advantage. If you agree with me, then get in contact with your representatives and senators and let them know that it is time for hard market economics. Remember, as a small business owner, you will pay for much of this, reap little if any benefit, and if it doesn't come out all right in the end like they're hoping it will, you will likely be left holding the bag.

Get in touch with your congressional representative and senator at the following links:

www.house.gov and www.senate.gov.