Punching Stupid and Evil in the Face Since 1986!

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Thursday, December 11, 2008

Bankruptcy is NOT the end of business

It is a mistake to assume that because folks disagree on the position to take concerning the auto bailout means one "doesn't get it". I do get it. I just completely and fully disagree with a bailout.

I understand things are very complicated. I understand a whole host of poor decisions on the part of the government and business got us to this point. I understand that we have to deal with what is NOW, not what has been. I understand many things need to be changed moving forward and I understand this does not change the fact that a taxpayer funded bailout is not the answer. I am not "punishing" the Big 3 because of the TARP fund fiasco. I completely disagree with the auto bailout for many reasons, none of which have to do with the bank bailout.

I believe the automakers must go through a Chapter 11 bankruptcy to dump the fat. They are not going to be able to cure what ails them by simply throwing money around.

A few reasons: (My arguments are right in line with these.)

  1. The UAW made concessions-The UAW is only conceding their fat, over-bloated agreements until the automakers reach profitability again. They are not permanently conceding most of the ridiculous and unsustainable levels of commitment. This will just put automakers right back where they are. Bankruptcy is the best way to get rid of these leech agreements.
  2. It is a loan, they will repay.-The existing repayment plan is based on car makers selling a certain amount of cars, if they don't they will need more money-as highlighted here. This is a huge gamble in my opinion. I think it is an unrealistic goal based on economic conditions today and into the near future.
  3. There will be government oversight.-I'm not even going to entertain this argument-do we not see what happens ALL the time with "government oversight"?
  4. The "car czar" will call back the loans if the restructuring plans are not met.-The plan does not require the government to "call back the loans" if automakers don't meet restructuring standards-it gives the option to call them. I have serious reservations they would be called under any circumstance-they will simply ask for and receive more money.
  5. Automakers' will close dealerships on their own to save money.-Doubtful, because of dealership strong holds in all 50 states, which encouraged tough franchise laws. It would make it slow and costly to do outside of bankruptcy.
  6. Millions will lose their jobs. If the Big 3 fails all of their vendors, suppliers and outside contractors will go under. –This is simply untrue. There will be jobs lost, but under a proper bankruptcy and restructuring plan it is estimated far fewer jobs will be lost, not the millions being touted by studies based on figures from the 1990's. This stance also completely disregards that every day firms are protected by bankruptcy proceedings and continue to do business and provide jobs.
  7. Over-regulation is what got the automakers in this mess.-I don't disagree on that point but, do we really think there will be less regulation once the government has partial ownership in the Big 3? I do not.
  8. People will not buy cars from a bankrupt company.-I will not dismiss this concern out-of-hand, but it is a remote possibility at best. I am not going into all the options available, but keep in mind-even with all the uncertainty people are buying cars now*third parties or trust funds could be established to maintain warranty coverage regardless of what happens*if bankruptcy brings back solvency it is a moot point.
  9. They admit
    they will be back for more money when they don't meet their projected sales figures.
  10. It is flat out nationalization of a private industry-a hop, skip, and a jump from socialism. I am against socialism.
  11. I cannot improve upon this post so, I will simply quote in part as I agree completely:

    • Argument: Restructuring in bankruptcy would be impossible because sufficient debtor-in-possession (DIP) financing is not available in the current economic climate.
    • Fact: DIP financing is available to firms undergoing restructuring that have strong business plans and profitable cores, and if it proves necessary, the government could provide a "lender of last resort' facility without sacrificing the benefits of a restructuring under bankruptcy.

It is not in the least that I "don't get it".

I disagree with almost every argument made for shelling out taxpayer money for a failing industry. I agree some jobs will be lost, but jobs are going to be lost no matter what happens. If the Big 3 actually and fully fails, all the jobs will be lost anyway and we will be billions of dollars more in debt. As I have stated before, I am in Mitt Romney's camp on this thing.

I will continue to exercise my right to protest what I feel is Washington's failed plan for the Big 3.

I'm sure I will not always agree with you; it's a big tent. I don't think that means you or I "don't get it."


  1. 1: Two years ago UAW made enormous concessions, the biggest of them being the take over of retiree health plans, which goes into effect soon. They also agreed to cut new employee pay in 1/2, meaning they would make less than half what Toyota, etc. pay their employees. Obviously these may be changed with the next contract negotiation, but judging from what UAW head said during the hearings last week, they will probably stay for a while.

    2: It's a loan they will have to repay. It's true they may be back for more, and we can debate that loan then, but the current loan is covered by assets the companies already have and this government loan is first priority should the companies fail.

    3: There are times where government oversight works. Sometimes it doesn't, but that's true of anything.

    4: Could go either way. It really depends on who is chosen as the car czar.

    5: Not sure on this so no opinion.

    6: This depends on what level of bankruptcy they go into. You believe they will turn around under chapter 11. As I lay out in my other points, under the current economic conditions, that will be difficult if not impossible.

    7: What regulation forced car companies to sell 10mpg SUVs? The only regulations on car production are CAFE standards, which have been at 24mpg (not including trucks) for almost 30 years. Their own CEOs and boards killed innovation because they thought it was too risky and they were making money on the SUVs. Toyota took the risk and benefited.

    8: One of the main selling points for new cars are long warranties. Without those, cars whose value drop as soon as you drive off the lot become an instant upside-down loan for the buyer. A company in bankruptcy doesn't have to honor warranties and so that incentive isn't there to sell the cars anymore. It may not be a huge effect, but in an already depressed market, a 10 year, 100,000 mile warranty will sell a car better than no warranty.

    9: No argument

    10: It isn't nationalization. The warrants the government will get are non-voting shares. The "car czar" is only a position to ensure our money is being properly used, unlike what happened with financials.

    11: DIP Financing is not available - http://financialweek.com/apps/pbcs.dll/article?AID=/20081013/REG/810129987/1003/TOC

    If I thought that chapter 11 would work and more importantly that the workers who had nothing to do with the failure would be protected, I would support bankruptcy. Unfortunately, that is not the case. If the financial system wasn't locked up, we probably wouldn't even be here because they could still get financing for the reforms they have been working on for the past couple years.

    The total plan is only $2 billion more than we spend in 1 month in Iraq. At least with this plan, we will get the money back.