In Praise of Bankruptcy

A number of columnists and industry experts have stepped up in the last week to remind an amnesiac Congress and public that the legal process to deal with companies that become insolvent (dare I say its name?) does not spell instant doom.

For example, most of the major airlines have declared bankruptcy at one time or another. The days and months after they filed Chapter 11, their planes still flew, their employees still got paid. Of course, people eventually lost their jobs in layoffs, some took pay cuts, some vendors didn't get paid for services delivered -- whatever was necessary to make the company profitable again, or attractive to investors or buyers. It's a process that's worked time and again..

And kudos to Obama's economic team for considering it as a possibility. Bloomberg reports that the team is studying a "pre-packaged" bankruptcy deal where GM would file for Chapter 11 protection with government financial backing in hand, allowing it to accelerate the restructuring process from the usual 5 years to perhaps as little as 2.

Unlike an outright grant or loan from the feds, Chapter 11 protection would allow GM to re-negotiate its labor and vendor contracts, a key element of making their cost structure more competitive.

If Obama champions such a deal, who would stand in the way? Again from the Bloomberg article:

House Speaker Nancy Pelosi said yesterday that Democrats reject bankruptcy as an option.

In or out of court, automakers will have to submit a viable business plan to gain government funds, Peter Peterson, senior chairman of Blackstone Group LP, said in an interview.

``Unless they can show us the plan, we can't show them the money,'' Pelosi said yesterday.

Pelosi is very pleased with her "show them the money" sound bite, but in all honesty, would you trust her to evaluate a business plan? Sure, Congress will hire experts, but can Congress be as objective about evaluating a business plan as, say, a venture capitalist?

And isn't it odd that Pelosi, Frank, Reid and others went on the record two weeks ago in favor of a bailout before seeing a plan? Why, all of a sudden, are they talking about business plans? It's as if they caught up in the enthusiasm of trying to save GM, and forgot the check the numbers.

Perhaps it has something to do with that fact that they don't have the votes to throw money at GM. And perhaps that has something to do with public opinion, and the possibility that taxpayers who earn average wages working for healthy companies don't want to subsidize other taxpayers who earn twice the prevailing wage in their industry -- while their companies lose money!

Don't be resentful, you say. Well, how about being fair? If GM were profitable, nobody would care how much they paid their employees, or whether their execs flew coach or in private jets. But they are not profitable, and show no signs of becoming so. Their business model is a sieve, and it's a fact that their cost structure is a big part of the problem. So drastic changes are in order. That's what Chapter 11 is for.

Obama talked about fairness a lot on the campaign trail. Here's a great opportunity to demonstrate what it means.