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The Objections

For all of the debate over a taxpayer bailout for the Big Three, the bankruptcy option has received very little criticism, even from bailout proponents. Instead, their arguments address a hypothetical "do nothing" option in which the Big Three cease oper*ations within the next year,[9] something that the bankruptcy process would actually prevent.

To an extent, however, that hypothetical has been conflated with bankruptcy, and this is both regrettable and misleading. Although industry insiders are adamant that bankruptcy "is not an option,"[10] they have offered only a single objection to it. That objection, and the "do nothing" hypo*thetical, simply do not undermine the case for let*ting our bankruptcy laws run their course.

Consumer Fear. The chief objection voiced to allowing any of the Big Three to slide into bank*ruptcy is that consumers would be unwilling to purchase vehicles made by a corporation that they fear could not honor warranties or supply parts.[11] But no automaker that hopes to rebuild a sustain*able business would turn its back on its custom*ers, so there is no reason to expect that one undergoing reorganization would ignore its cus*tomer's valid claims and expectations, which would be a recipe for certain failure. There is no incentive, then, for parties to a bankruptcy to take steps like reneging on warranties that would undermine the company's business.

Further, the Big Three are advertising dynamos and some of the biggest media buyers in the coun*try, able to get out the message that they are on the path to recovery and expect to remain in business for a long time.[12] A fast reorganization that restores profitability could even leave potential customers more confident about an automaker's future than they are today--perhaps even more so than a bail*out that does little to bolster confidence.

Shareholder Loss. "Bankrupt" is just another word for "insolvent," which means that one's assets are insufficient to cover one's debts. Because most corporations that enter bankruptcy are already insolvent, shareholders have already effectively lost their stake in the company--that is, their shares are worth nothing or nearly nothing.

The legal bankruptcy process serves, in other words, not to aid shareholders but to ensure a fair outcome for creditors, who are competing for shares of a pot of money that is worth less than their claims. The bankruptcy process, then, usually wipes out shareholders' stakes and recognizes that the creditors now own the corporation. While this may be a great psychological loss to shareholders, it is rarely a significant financial one because, in most cases, the value of the corporation has declined prior to filing and most shareholder value has already evaporated.

In the case of General Motors, as of November 13, the corporation's market capitalization--that is, the value of all of its shares--was well under $2 billion, while Ford's market capitalization was under $4 billion. By contrast, Apple Inc., the niche computer maker, was worth over $80 billion. A bankruptcy filing would merely reflect the reality that these automakers are in fact bankrupt and their shares therefore worthless.

Job Losses. Big Three and union representatives imply that failure to provide government funding to the auto industry, and thus delay its slide into bankruptcy, would cost millions of jobs--up to 5.5 million over three years.[13] This figure is misquoted from an auto industry report that estimates the effect of a "100 percent reduction in Detroit Three U.S. operations"--in other words, that the Big Three cease operations within the next year, which is far-fetched even as a worst-case scenario.[14] Undoubtedly, reorganization under bankruptcy will result in some layoffs, but these are necessary to ensure the long-term health and survival of the industry and to allow it to create jobs in the future.

It is also important to consider the alternative to reorganization in bankruptcy: a taxpayer-funded bailout by the government. By allowing automakers to delay making tough decisions and restructuring their operations, a bailout would allow the industry to continue to limp along, bleeding jobs, until insol*vency looms again. Another few years of this list*lessness, however, would leave the industry in an even weaker state than it is in today, especially if the government uses it as an outlet for industrial policy, as some lawmakers have suggested.[15] At that point, even more jobs would be vulnerable.

There is also the likelihood that a government bail*out would entail unintended consequences, such as those that have beset AIG (American International Group) since the government rescued it earlier this year over the objections of shareholders and insiders who say that bankruptcy would have been a safer, more orderly alternative.[16] More generally, any bail*out will come with conditions arising from political expediency, from salary caps for executives to limita*tions on plant openings and closings. These will reduce flexibility and, in the end, probably jobs.

In contrast to the pitfalls of a bailout, reorganiza*tion, while costing some jobs now, is the best option for the industry to regain its footing and return to growth, including job gains, in the future.

The End of the Industry. As millions of Ameri*cans have experienced firsthand, bankruptcy is not the end, but a beginning. The Big Three have highly skilled productive workers and valuable assets but have struggled to organize them in a way that results in profitability. This is exactly the kind of challenge that Chapter 11 of the Bankruptcy Code was designed to meet: realizing the full value of assets and organizations that have been misman*aged and kept from reaching their potential.

Reorganization, Then Resurgence

When a business reaches the point of insolvency and is unable to meet its obligations as they become due, it no longer has any good or easy options. Any path out of insolvency will require making difficult decisions that affect some stake*holders' interests and fundamentally alter the nature of the business. That has nothing to do with the legal process of bankruptcy, but with economic realities. That the Big Three are running out of cash simply demonstrates that their business models have failed and that they must chart a new course if they are to regain any of their former glory.

The legal bankruptcy process is simply the way that this imperative is carried out. Chapter 11 reor*ganization allows businesses that have run up against adverse economic realities to change course quickly, avoiding the legal shoals that so often pre*vent radical changes outside of bankruptcy. Fur*ther, Chapter 11 requires that this be done in a way that is likely to succeed and that creates the right process and incentives to start even the largest cor*porate reorganizations on their way. Though they are larger than most businesses, the Big Three present precisely the kind of scenario that Chapter 11 was designed to address.

For the Big Three, staying the course--which political realities render the only alternative to reor*ganization in bankruptcy--guarantees failure, if not now, then in a few short years. Outside of bankruptcy, the automakers will have neither the legal ability nor the incentives or wherewithal to reform their labor agreements, consolidate their brands, eliminate massive redundancies, find new leadership, and rethink, from top to bottom, how they produce and market automobiles.

Delaying these reforms will only lead to a reprise of the current crisis, except that it will be a deeper crisis and one that the automakers are less likely to escape. If the Big Three are to survive and prosper, reorganization in bankruptcy presents their great*est chance.