General Motors, having sucked up $9.4 billion of taxpayer cash since
Christmas, now desperately craves the remaining $4 billion authorized
by President Bush for disbursement in February.
And come March, once that new money has disappeared down the Detroit
drain hole, renewed pleas for aid will undoubtedly land on President
Obama’s desk. Will the new chief executive emulate Bush, bowing to the
anti-bankruptcy sentiment fomented by Rep. Barney Frank, chairman of
the House Financial Services Committee, and others who advocate bailing
out the Detroit automakers? Or will he let the bankruptcy courts take
“There’s only one thing you can do in bankruptcy that you can’t do
outside of bankruptcy--break your word, break your deals,” said Frank
in a “60 Minutes” interview. “It allows you to say to the small
businesses who have been catering lunches for you, ‘sorry, we’re not
paying you.’ It allows you to go to the workers and say, ‘sorry, we’re
not paying you.’”
Really? So bankruptcy is a get-out-of-jail-free card that allows
treacherous companies to escape payment obligations they would
otherwise have to honor? Sorry, Mr. Frank, but that’s a fantasy.
Plodding behemoths like General Motors are not even eligible for
bankruptcy until they’ve become insolvent, which means they already
can’t pay their bills and have no prospects for recovery. What
bankruptcy does is treat the victims of those broken deals fairly--by
preventing the bankrupt company from playing favorites among unpaid
creditors, and by giving those creditors a big say in the distressed
If an automaker can return to profitability by streamlining
products, cutting staff, or closing plants, a bankruptcy judge can
allow a reorganization. But a company that’s hopelessly floundering may
have to be liquidated through an orderly sale of assets, with income
paid to creditors according to their existing contract rights.
Yes, Mr. Frank, some creditors walk away from a bankruptcy
empty-handed, or collect only pennies on each dollar of debt. Caterers,
assembly-line workers, material suppliers, landlords--everyone who does
business with a company in a market economy assumes a risk of
nonpayment. But that needn’t spell disaster if creditors take steps in
advance to confine the pain of bankruptcy within reasonable limits.
Wise businessmen check on credit histories, set limits on outstanding
balances, and register liens on hard assets. Even unions can protect
their members, such as by having pension funds placed in trusts
sheltered from bankruptcy proceedings.
Under bankruptcy, the risk of financial loss stays right where it
belongs, on those who assumed the risk of non-payment by voluntarily
dealing with a badly managed company. But in Barney Frank’s bailout
universe, Congress can simply paper over the reality of business
failure by shifting those losses to taxpayers, competitors, and
consumers--in short, everyone who doesn’t deserve to pay.
This means that if GM’s caterers don’t get paid for the hors
d’oeuvres served to CEO Rick Wagoner and his team of corporate bailout
beggars, you and I must foot the bill. And if UAW members fear losing
the staggeringly high wages and benefits they’ve extorted over decades
using pro-union legal privileges, society must ride to their rescue.
But shifting the financial pain of business failure onto society at
large is unjust. Most obviously, taxpayers shouldn’t be forced to prop
up failing companies’ balance sheets. But other victims abound. Think
of the profitable competitors with hard-earned credit standings,
watching with justified resentment as badly managed rivals line up at
the public trough.
Consumers, too, pay a price for bailouts. Bailed-out firms flood the
market with inferior products--GM cars, anyone?--by continuing to own
assets that would have gone to making more desirable products if market
forces had ruled. Just picture today’s city streets if the horse and
buggy industry had been bailed out a century ago.
Is General Motors to become a brain-dead patient in a Federal
bailout ward, languishing on tax-funded life support beyond all hope of
recovery? Not if Congress steps aside and lets the bankruptcy courts do
justice through adjudication.