Detroit, Mich. — While Planet Congress argues over whether to spend $25 billion to make the deck chairs greener on Detroit’s sinking Titanic, American bankruptcy lawyers have been coalescing around the idea that the Big Three ought to be exploring a government-supported bankruptcy plan to save the ship.
Lynn LoPecki, a law professor at UCLA and Harvard law schools, says there is a growing academic consensus for a so-called “public debt-in-possession” (or public DIP) in which the feds would be the primary lender in bankruptcy court. A public DIP would both guarantee that Detroit automakers do the wrenching work necessary to transform their companies, while also encouraging other lenders to join in bankruptcy financing in a difficult credit climate.
LoPecki “disputes as unlikely” the Detroit/DC conventional wisdom that the auto companies would fail in bankruptcy. “They are likely to emerge,” he says. “Very large companies rarely do not emerge from Chapter 11.”
What he does not dispute is that Big Three execs would lose their jobs – which is why it is in their self-interest to scare Congress into believing that bankruptcy would be apocalyptic. For its part, Congress is also incentivised against bankruptcy since it would likely significantly diminish the power of auto unions – a major source of Democratic funding.
If such a bankruptcy filing were allowed to take place, says LoPecki, the companies would emerge much smaller — but also better able to compete against their Japanese rivals.
Michael E. Levine, Distinguished Research Scholar and Senior Lecturer at NYU Law School, concurs. Levine admits the difficulty of bankruptcy in the current credit squeeze, and sees a public DIP as a solution. “The point,” he says, “is for the government to pay for surgery, not just for a transfusion.”
Bill Swelbar, an engineer and consultant now at MIT, brings an airline-bankruptcy perspective. He says the events of 9/11, a “freak act of nature” not unlike the current financial crisis, was a disguised blessing for airlines because it exposed their financial weaknesses and forced them – through bankruptcy – to deal with fundamental structural problems. U.S. airlines . . . meet U.S. autos.
Swelbar also questions the Washington conventional wisdom that no one will buy cars from bankrupt companies. He remembers similar fears about airlines. “Everyone said no one will ever fly a bankrupt airline because they will be unsafe,” he says. It was also said that consumers would not purchase tickets for fear no airline would exist when the trip came due.
Such fears were overblown. Yes, some airlines saw declines in ridership. But ultimately, bankruptcy brought a healthier, more competitive industry that has weathered even the recent oil price and financial storms. In fact, says, Swelbar, today’s airline industry is also “greener” because they’ve had the fiscal room to maneuver and negotiate more fuel-efficient fleets.
Planet Congress take note.