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Commentary: Bankruptcy could benefit the Big Three

This article first appeared in the St. Louis Beacon: November 21, 2008 - The auto industry is pulling out all stops to secure a place at the public trough. In the latest development, Congress has given the automakers an ultimatum: No plan no bailout.

Yesterday Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi gave the Big Three until Dec. 2 to present a plan that gives Congress -- and taxpayers -- some assurance of "accountability and viability." Even if the deadline is met, using taxpayer money to keep the automakers in the driver's seat is a bad idea.

First, let's dispel the notion that saving the automakers is the "fair" thing to do. Just because Treasury has infused hundreds of billions to keep the financial system operating doesn't mean the government should rescue every troubled company that comes knocking. Banks are different from other firms. When credit markets fail to operate, business grinds to a halt. Even though proponents of the auto bailout argue that they deserve the same treatment as banks, the economic consequences just are not the same.

Auto executives and labor unions think they are just too big to fail. (It is the Big Three, after all.) "Facts" of the dire economic costs of their failure are published in full-page newspaper ads. For example, more than 5 million jobs would be lost; personal income in the United States would decline by more than $150 billion next year alone; and local, state and federal governments would bear costs (lost tax revenue, increased unemployment and health assistance) reaching $156 billion in a few years.

With facts like these, how could anyone in their right mind not pony up a measly $25 billion?

These facts come from the Center for Automotive Research in Ann Arbor, Mich. The scenario used to generate these costs assumes that Chrysler, Ford and GM would all cease operations. If the Big Three in Detroit vanish without immediate taxpayer assistance, their business model is more suspect than their lack of success suggests.

You might be thinking, well what's another $25 billion if the automakers can survive a bit longer and get back on the road to profitability. After all, the bill being drafted won't just hand money out with no strings, right? The current draft of the bill imposes certain restrictions, such as no dividends get paid and no bonuses for executives making more than $200,000. Ouch, that'll make them take notice.

What I don't understand is why the now-required plan of viability - in management classes we call it a strategic plan - wasn't required by Congress in the first place. It's not like the automakers have enjoyed enormous success over the past few years. Have they just been waiting for someone to nudge them into saving their business?

Equally curious the lack of an exit strategy by proponents of the bailout. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said on National Public Radio that if the automakers meet the deadline (he was referring to an earlier March 31 one) with a plausible recovery plan (whatever that means), they could access more funding. If Chrysler, Ford and GM can't survive without $25 billion in corporate welfare, they shouldn't remain in business.

Some form of Chapter 11 bankruptcy protection is the domestic automakers' most viable choice. It also is the best long-term solution for taxpayers. Under a managed bankruptcy proceeding, the companies would gain valuable time to reshape their business models and renegotiate their obligations to creditors and their contracts with labor unions. In short, they would get shot at starting over.

Can anyone with their track record ask for more?

Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.