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Is There a Good Auto Bailout?


Sure, in principle.

There appears to irresistible momentum behind a “temporary” bailout designed to forestall bankruptcy until the new administration is in place. The problem with imagining that this does anything other than kicking the can down the road a few months (at a cost of putting $15 billion at risk) is that there is no reason to believe that Detroit will be any better able to pay its bills in March than they are today.

Let’s start at the beginning. These companies have a solvency problem, not just a liquidity problem. When you add up all the contractually-obligated payments they have to make to employees, retirees, suppliers, bondholders and so on, there just isn’t enough cash to go around. If they could escape these prior commitments and manage themselves more intelligently, there are profitable operating companies buried in there, but they are trapped underneath the absolute size of the commitments they have made. Everybody is either better off or no worse off if this happens, as compared to just liquidating the assets in a fire sale. This is exactly what Chapter 11 bankruptcy is meant to do.

Experts disagree about whether a literal application of a Chapter 11 process would work for the Big 3. So, if we could stipulate that we could get all of the effects of an orderly bankruptcy through some government-sponsored process that just had a different name, then of course we should do it. If we had a process called conservatorship or something, in which a set of government employees called an oversight board, who are insulated from political pressure and have very similar motivations and authorities to the government employee named by a bankruptcy judge, makes decisions that force renegotiation of contracts and a change of ownership, we would have a materially identical process to bankruptcy. This hypothetical alternative could — again, in theory — actually be superior if it could reduce some of the inevitable disruption in consumer demand that would very likely be created by bankruptcy.

Of course, as even thoughtful liberals have observed, this is easier said than done. What are the odds that members of Congress are really going to vote for a body that can be directly tied to them that will do things like tear up all UAW labor contracts, tell every holder of a share of GM stock in the U.S. that they’re just out of luck, aggressively fire tens of thousands of white collar workers in politically-competitive states and districts throughout the industrial Midwest, and tell anybody who owns a house in Michigan that he has just gotten a lot poorer?

This seems to me to be the acid test of whether such a plan will work, in the sense of ending up with a competitive auto industry and minimum moral hazard, instead of an inefficient jobs program. Unfortunately, the key aspects of the requirements that Congress actually seems to be imposing look more like a political kabuki dance: government warrants (a good idea; but the key open question is the priority and assets against which this $15 billion will be securitized), limits on executive comp and the appointment of a car czar selected from the Washington bureaucratic class.