1. Bankruptcy judge functions go to the executive. A standard feature of crisis governance, executive power rises at the expense of other branches of government—Congress and, here, the judiciary. Why give more power to the executive? A crisis is a political problem; judges lack both political expertise and democratic legitimacy. They don’t know what to do, and wouldn’t be trusted in any event. In bankruptcy, parties have an interest in creating a firm that has maximum going concern value; relative bargaining power determines how the losses are divided. But the bankruptcy judge has little power to crack the whip, and value can be squandered as parties bluff and bargain. The only case for the executive-managed reorganization is that the executive can draw on carrots and sticks to hurry the parties along, favoring those who are cooperative and penalizing those who are not. This is the positive spin on Todd’s complaint that bankruptcy is “politicized.” Bankruptcy law is one-size-fits-all and not necessarily appropriate for current conditions. Can an executive branch car-czar with broad powers function more effectively than a bankruptcy judge with limited powers? Depends who they are. If not –
2. Bankruptcy law remains the backdrop (maybe!). Managers, workers, suppliers, dealers know that if they can’t reach a deal, they end up in bankruptcy. If they are rational and can overcome bargaining costs, they should simply divide the monetary equivalent of the government’s free loan (not the loan itself, but the financial equivalent of being able to stay in business an extra couple months when the market would otherwise shut them down) prior to the hard work of reorganizing the companies.
2 1/2. Bankruptcy remains the backdrop (maybe not!). Alternatively, the players might predict that the Obama administration will maintain the federal pap—whatever interest group dynamics that compel bailout today will compel bailout tomorrow. The car industry will become a long-term Amtrak-like federal vehicle for transferring resources to politically influential, geographically concentrated people—mostly middle class or wealthy.
Am I missing some other stick?
Grrr.
Okay. I suppose an argument can be made. So why isn't it across the board, to include managers all the way up to the top? The managers in Japanese and German car companies don't make nearly the amount these bloated executives do. Why isn't their pay also tied to foriegn industry standards?
And for that matter, why arne't the salaries of all the wall street execs tied to foreign industry standards either? If foreign companies are now the gold standard for pay, then it should be for everyone, not just the blue collar workers.
The good news is that Ford was not lumped in with them. At least the Bush team got that right.
The bankruptcy of a private firm is a legal problem. Judges possess legal expertise and Constitutional legitimacy. A crisis is what we get into when we allow pervasive government meddling in and disruption of markets.
Fruitless bluffing is exactly what the recent political machinations, in DC, regarding Detroit, have been about.
I'm still wondering what the purported Constitutional basis is for the feds to take money from people all around the country to prop up failing private firms.
1.. The bankruptcy court puts the designs of all parts, patents and technology of all big 3 cars into the public domain so no one ever has to worry about getting their car fixed. Someone will always be able to build parts or systems for all makes and models. In fact, making the designs open source could possibly lead to better parts, car designs and repair solutions.
2. The bankruptcy court assigns to their boards someone who has a clue about how to cut costs and manufacture in a cut throat environment. Michael Dell and Andy Grove come to mind.
3. The court creates a warranty fund, much like the FDIC, where every car sold has some dollar amount go into the fund to pay for warranty service for a maximum of up to 3 years. In the event the Big 3 cant survive out of bankruptcy, repairs on the cars for models sold while the companies are in bankruptcy become a tax credit, with the treasury being reimbursed for these repairs from the fund. (btw, I hate to do something using tax credits, so if anyone else has a better suggestion on how to deal with and pay for warranties..)
Um, no. No one is suppressing wages. If nothing is done, i.e. no bail out, then the expected salaries for a good portion of these union workers is going to be $0.00/yr. The unions are being given the option of $0.00/yr (which is the amount that they are entitled to) or 75% as a handout. If someone comes begging for food, they don't get to ask for prime rib, they get what they get and, if they aren't complete ingrates, they're thankful for it.
This makes me wonder whether you took your law school's basic bankruptcy course. I did -- and though I was second semester 3L at the time -- I recall a completely different understanding of the code. Bankruptcy law is mushy. Outcomes are determined on a case-by-case application of broad equitable principles and powers, which are hardly "limited" under any normal usage of the word.
Remember Congress! If someone wanted to increase pork next year by 12% and Congress only goes up 4% then, that is a net savings of 8%. The UAW will calculate the same way. GM &F will talk reductions while signing sidebar agreements that will raise total labor costs, knowing that when they come back in May they'll get as much as they ask for.
This, BTW, is the terrible model for public unions. An aggressive union negotiating with a passive partner who, for various reasons, can't take a hard line, e.g., strike, inevitably caves to union extortion. Labor gains and achievements become so embarrassing that worker gains are no longer primary and the union's institutional demands take over.
Check Mexico where almost every CBA includes a management contribution to the union building fund.
This is bad but will get a lot worse.
... as opposed to the financial industry bailout?
Who can threaten the deal the most? If one party demands 99% of the surplus or else, do we give it to them? What if two parties each 99% of the surplus?
It seems to me that first it should be determined whether any of the "Big-but-decrepit-and shrinking 3" can be resurrected as legitimate businesses, or if liquidation is the only viable business (as opposed to liberal social) answer. Then debate bankruptcy/recovery terms and conditions.
Who does that, and how?
First someone has to raise the issue rather than assume a particular outcome is possible. Then the subsequent questions indeed becomes "who" and "how". I would submit the answer is not "government" and it may be "receiver appointed by a bankruptcy judge".
Actually, I think one of the classic takeover guys like Kirk Kerkorian who built a fortune by envisioning the future, evaluating investments and pushing for maximizing market value might have the right kind of knowledge and skills. He's probably too old now, though there are others like him, but I somehow doubt such a person would ever be appointed. They would probably be judged inappropriate for lacking social conscience.
This is also known as a self-licking ice cream cone.
The fact of the matter is that the uncertainty over whether the auto companies are going to file bankruptcy kills consumer confidence. I watch it happen with airlines, etc. and see no reason that cars would be any different. Filing for bankrupcy *would* temporarily hurt sales. However, sales would recover after, and some sales may be merely delayed to see what happens (i.e. delayed rather than lost sales).
As bad as that is, I think it is worse to simply bail out the companies when times get tough. This sort of thing leads to reckless business management IMO, and may cause problems down the road. I don't think the auto companies are likely to fail at the moment. However, I do think that they will go through some tough times.
Limits on executive compensation are one thing, but if this is like the wall street bailout, we will probably have no substantive measures to ensure that this is not happening.
In ordinary times, or even rough times in an ordinary cycle, I'd agree. But what's at stake here is more than just the failure of the auto industry, its suppliers, dealers, etc., which alone would be cause for concern. Now the risk is that such failure would exacerbate the crises of credit market and consumer confidence we're trying to corral to head off a full blown economic disaster.
Why should the unions be asked for this (or have it crammed down their throats)? Because their contracts are much of what make U.S. cars uneconomical. Absent bailouts AND reform of the union agreements, bankruptcy is inevitable, and then they will have much less power than they will with an incoming Democratic Administration with strong Democratic majorities in both houses of Congress. Before then, any Big 3 "bailouts" will effectively be U.S. taxpayers subsidizing early retirement benefits and uneconomic work rules of union and retired union workers.
If that idea worked then all those Wall Street banks where the executives are rewarded with tons of stock, would be in great shape.
Re: any Big 3 "bailouts" will effectively be U.S. taxpayers subsidizing early retirement benefits
If the any of car companies go under the taxpayers will be doing that anyway via the pension guarantee fund-- which may well need a bailout itself then. So we can either have a bailout where there's a chance we'll get the money back with interest (that's happened before) or we can incur huge welfare costs for unemployed (and perhaps unemployable) workers and retirees, which we have no chance of getting back.
If the any of car companies go under the taxpayers will be doing that anyway via the pension guarantee fund-- which may well need a bailout itself then. So we can either have a bailout where there's a chance we'll get the money back with interest (that's happened before) or we can incur huge welfare costs for unemployed (and perhaps unemployable) workers and retirees, which we have no chance of getting back.
I suspect that if there is a bailout for the auto industry, it will be followed by additional bailouts and will have the effect of only delaying not preventing the collapse of GM, Chrysler and Ford. In which case, federal taxpayers would end up paying for both the cost of the bailout(s) and welfare benefits.
Also, even if the bailout is in the form of a “loan,” given that the Obama administration has other priorities such as promoting “green technology,” allowing the States to regulate CO2 with a minimum of opposition, and federal control over health insurance, I suspect that we might see a significant portion of the principal as well as the interest being “forgiven” in exchange for the D3 acceding to the Obama administration’s priorities.
Finally as far as the aforementioned welfare benefits go, the D3 retirees who are eligible are no doubt already receiving Medicare and Social Security benefits. In which case a bailout for their pension and health care benefits would not reduce their draw on the public treasury, it would only supplement it. As far as the other D3 retirees who aren’t yet old enough for Medicare and Social Security, they would most likely be receiving Medicaid and unemployment insurance which I suspect are cheaper than the cost of the defined benefit pensions and health benefits and in addition, at least a portion of the expense would be paid for by Michigan rather than federal taxpayers. The same would likely be true for current D3 employees, at least some of whom would go back to work (albeit at lower wages and benefits) and others who would probably lose their jobs anyway when the D3 do their necessary restructuring.
In short, it would probably be cheaper to let the D3 go into Chapter 11 and make the necessary restructuring than multiple bailouts which would only postpone rather than prevent that restructuring while forcing federal taxpayers to in effect pay twice.
Cheaper is not better for Democratic incumbents, because that would deny them an on-going subsidy to grateful recipients who would generously share with deserving Democratic incubments.
Yeah. I hear the Democrats engineered the whole financial collapse just to create a pretext for lining the pockets of Al Sharpton and Barbara Streisand with a couple of trillion dollars of taxpayer-funded graft.
Tell us how many elections Sharpton and Streisand have won. Especially compared to Senator Christopher Dodd and Congressman Barney Frank.
To some extent, there is a fixed pool of resources out there. Talent, at a minimum, is a fixed resource for the medium term. Bailouts divert more and more of those resources to inefficient uses.
We got into this mess just like we got into the tech mess and other messes before it. The financial sector diverted more and more resources into inefficient uses. The solution (even for the short term) is to stop doing that. The lesson to learn is to never do that again.
Gluttony kills more men than the sword.
Good health is above wealth
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