The Joy Of Bankruptcy

So good it has to be passed on in its entirety.

The Joy of Bankruptcy

Congress is back in session this week to discuss a bailout of the car industry, and, as of Wednesday, the S&P 500 is down over 7.4% in three days. Americans, who have seen their 401K’s cut by 40% on average, and the value of their housing by as much as 25%, will be called on to support the full retirement and healthcare benefits of GM, Ford and Chrysler management and union employees, as if these are sacred.

It is true that many jobs left Detroit, but mostly for car plants in Tennessee and the Carolinas, where union work rules and health benefits didn’t add an additional thousand or so to the cost of a car. Supporting failed companies has been tried before and failed—in Japan. The Japanese rolling bank bailouts became widely known among Wall Street professionals as “zombie banks” that kept walking after they were dead. The Japanese banks did not want to lose face, or suffer the shame of a liquidating bankruptcy, so the government supported them for what is now known in Japan as the lost decade of the entire 1990’s. For the most part, they were neither rehabilitated nor sold. So they were zombies, living in the twilight zone. While the Japanese are very competitive in the car industry today, their depressed economy led to a major decline in their birthrate, so there will be fewer Japanese in the future and it is unlikely that Japan will ever recover the vibrancy it had before the invasion of the zombies.

Now the zombies want America. The Big Three and the UAW made an unholy alliance in the 1950’s that resulted in unsustainable labor costs ($73 per hour!), including runaway pension and healthcare costs, and too many unprofitable car brands, resulting in a loss of market share of over 90% in the 1950’s to less than 50% today. When they were teetering on the edge, the federal government kicked them over the cliff by burdening them with increasing requirements like ever higher mileage standards that make cars more expensive. By one estimate, the new 40 mpg average mandated by Congress by 2020 will add $6000 to the cost of the average car.

When this news hit last year GM was trading at $40 per share, and Ford was over $8 per share, but it cast a shadow over the ability of these companies to raise more equity. Now, thanks to a perfect storm of a housing slump (people often buy cars when they move to a new house), the extinction of car loan credit, the looming retirement costs of workers and a generally poor economy, GM shares trade under $3 per share and Ford shares trade at a little over one dollar per share. Over $50 billion of equity value has been wiped out in a year. At these prices, the car companies cannot raise the money they need to survive without bankruptcy, and, like everyone else, they need to slim down. Bailing them out, without a bankruptcy, will not save GM, Ford and Chrysler, their management, workers, lenders or shareholders. And even with this damage, Congress is insisting any additional money be tied to the presentation of a business plan requiring the car companies to get even more mileage out of their fleets on top of last year’s new standards.

President Bush, who has already allocated $25 billion to their rescue under the TARP program, advocates that the funds be released without any additional green standards. So, as the Wall Street Journal points out, not only does Congress want a second $25 billion granted to the industry, but it wants the money allocated in a green fashion, giving higher priority to environmental concerns than near term job losses. Greenliness is clearly next to Godliness. Any program that emerges with the first $25 billion for a bailout, let alone the second $25 billion will not make America substantially greener. It will only prolong the agony, and leave us with fewer resources to establish real car companies with real cars that people actually want even without subsidies, subsidies which are never sustainable in the long run against tough local and foreign competitors.

In Japan, the troubled banks were insolvent by 1991, but there was no liquidation of a bank until 1996, when Hanwa Bank was liquidated. Throughout the 1990’s, the emphasis in Japanese bankruptcy law was liquidation rather than rehabilitation, until US style reform of Japanese bankruptcy law in 2000. In Europe, for multi-jurisdiction loans, on a practical basis, rehabilitation bankruptcy is either not available at all, or in part, when a business has failed because creditors cannot be stopped from foreclosing, so there is no second chance for management. “Everything must go,” especially in Germany. So they have experienced slower growth because over the years they have not adapted to new economic conditions as rapidly as we have and management has to go down with the ship.

America is already the home of second chances. We learn from our mistakes. But our Congress, more eager than ever to save people from their own bad behavior wants to bailout the car industry without bankruptcy. Bankruptcy in America should be seen for what it is: a redemptive affirmation of life, where commercial sins are forgiven, and you can get an orderly second chance because everyone gives something.

The point of having a bankruptcy law is that we want people to take chances. Not all the brands that make up GM would disappear in a bankruptcy. The viable plants and brands would survive, perhaps managed by the same management and built by the same unions. The weak brands and plants would be liquidated making way for new growth in other industries. The idea of having middle class America save the management’s and the union workers’ bacon is repugnant and unfair, particularly if they do not have to sacrifice. Without a traditional bankruptcy auction, where anyone can bid on assets, America’s taxpayers will never know if they were cheated, so they must assume that they have been. And if we bail out GM, where do we stop?

Congress had a major hand in placing burdens on GM, Ford and Chrysler that caused them to fail, and now it wants our money to fix its mistakes and their mistakes without anyone acknowledging fault. An America that has embraced change ought to be able to move on from an auto industry that has not adapted, and a Congress that is willfully blind to its own fatal side effects. But without acknowledgment of mistakes, there can be no redemption.

We already have good laws and commercial practices that allow for second chances way more than most of the developed world. We just need to be thankful for, and use, what we already have.

Sincerely,
Eric T. Singer
President

Congressional Effect Management