So, how exactly does an auto bailout help?
November 07, 2008
– Comments (11)
I wrote a long reply to MichaelinWA's blog on bailing out the auto industry and thought it was worth it's own entry.
I see several flaws with an auto industry bailout.
Proponents argue bailing out automakers will save jobs. I disagree. Even if the gov't steps in, these companies need to downsize and cut jobs. If one of these companies go bankrupt, the jobs don't just disappear. Operations don't cease.
Since these are ongoing operations, a bankruptcy would likely be Ch.11 - restructuring, not Ch. 7 - liquidation. A restructuring is just that. A bankruptcy court hears arguments and restructures contracts and obligations. Typically, shareholders get wiped out and creditors end up with some reduced settlement.
Those who argue that a gov't bailout will save jobs need to explain how gov't intervention results in fewer job losses than a bankruptcy proceeding. I don't see any way anyone could predict which approach would result in the smallest number of lost jobs.
The group a bailout helps the most is bondholders and other creditors. Outside of bankruptcy, the companies have few options for restructuring the debt.
Union members who keep their jobs are probably the next group who benefits most since it's highly unlikely pay and benefits packages get restructured outside of bankruptcy. However, because a bankruptcy restructuring might lower labor costs, it's possible fewer jobs would be lost in a bankruptcy.
Shareholders also benefit from gov't intervention compared to bankruptcy. If history repeats, the gov't will demand warrants severely diluting common stock holders. Not good for them, but better than going to zero in bankruptcy.
Management is probably better off with a gov't bailout. The gov't could demand a clean slate of upper management as a condition for a bailout, but no way to predict how they might do that. If it went to bankruptcy, the creditors take charge and current management has little say in running the show.
We're being sold a bill of goods again. There are proven procedures in place for businesses that can't pay their bills. Bankruptcy would not mean the end of GM or F and a reset might be just what they need to become competitive again.
This needs to stop. If the gov't intervenes to save auto companies, you can bet homebuilders and others will be quickly lining up with their lobbyists arguing why they deserve a bailout too.
If we're going to break the Treasury's bank, let's at least break it for something we need anyway like repairing infrastructure. Guaranteed jobs there and if we're going to drive little shoebox cars, the potholes better get filled. Corporate bailouts are nearly certain to cost taxpayers money - not nearly so certain there's any benefit for the dollars spent.
Allright Fools, help me out. What did I get wrong? Can anyone explain definitively why a gov't bailout works better than Chapter 11 for automakers?
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