Let bankruptcy courts take the wheel
By Thomas A. Bowden
And come March, once that new money has disappeared down the Detroit drain hole, renewed pleas for aid will undoubtedly land on President Obama's desk. Will the new chief executive emulate Bush, bowing to the anti-bankruptcy sentiment fomented by Rep. Barney Frank, chairman of the House Financial Services Committee, and others who advocate bailing out the Detroit automakers? Or will he let the bankruptcy courts take charge?
"There's only one thing you can do in bankruptcy that you can't do outside of bankruptcy--break your word, break your deals," said Frank in a 60 Minutes interview. "It allows you to say to the small businesses who have been catering lunches for you, ‘sorry, we're not paying you.' It allows you to go to the workers and say, ‘sorry, we're not paying you.'"
Really? So bankruptcy is a get-out-of-jail-free card that allows treacherous companies to escape payment obligations they would otherwise have to honor? Sorry, Mr. Frank, but that's a fantasy.
Plodding behemoths like General Motors are not even eligible for bankruptcy until they've become insolvent, which means they already can't pay their bills and have no prospects for recovery. What bankruptcy does is treat the victims of those broken deals fairly--by preventing the bankrupt company from playing favorites among unpaid creditors, and by giving those creditors a big say in the distressed company's future.
If an automaker can return to profitability by streamlining products, cutting staff, or closing plants, a bankruptcy judge can allow a reorganization. But a company that's hopelessly floundering may have to be liquidated through an orderly sale of assets, with income paid to creditors according to their existing contract rights.
Yes, Mr. Frank, some creditors walk away from a bankruptcy empty-handed, or collect only pennies on each dollar of debt. Caterers, assembly-line workers, material suppliers, landlords--everyone who does business with a company in a market economy assumes a risk of nonpayment. But that needn't spell disaster if creditors take steps in advance to confine the pain of bankruptcy within reasonable limits. Wise businessmen check on credit histories, set limits on outstanding balances, and register liens on hard assets. Even unions can protect their members, such as by having pension funds placed in trusts sheltered from bankruptcy proceedings.
Under bankruptcy, the risk of financial loss stays right where it belongs, on those who assumed the risk of non-payment by voluntarily dealing with a badly managed company. But in Barney Frank's bailout universe, Congress can simply paper over the reality of business failure by shifting those losses to taxpayers, competitors, and consumers--in short, everyone who doesn't deserve to pay.
This means that if GM's caterers don't get paid for the hors d'oeuvres served to CEO Rick Wagoner and his team of corporate bailout beggars, you and I must foot the bill. And if UAW members fear losing the staggeringly high wages and benefits they've extorted over decades using pro-union legal privileges, society must ride to their rescue.
But shifting the financial pain of business failure onto society at large is unjust. Most obviously, taxpayers shouldn't be forced to prop up failing companies' balance sheets. But other victims abound. Think of the profitable competitors with hard-earned credit standings, watching with justified resentment as badly managed rivals line up at the public trough.
Consumers, too, pay a price for bailouts. Bailed-out firms flood the market with inferior products--GM cars, anyone?--by continuing to own assets that would have gone to making more desirable products if market forces had ruled. Just picture today's city streets if the horse and buggy industry had been bailed out a century ago.
Is General Motors to become a brain-dead patient in a Federal bailout ward, languishing on tax-funded life support beyond all hope of recovery? Not if Congress steps aside and lets the bankruptcy courts do justice through adjudication.
Thomas A. Bowden is an analyst at the Ayn Rand Center for Individual Rights. Mr. Bowden is a former lawyer and law school instructor who practiced for twenty years in Baltimore, Maryland. The Ayn Rand Center is a division of the Ayn Rand Institute and promotes the philosophy of Ayn Rand, author of "Atlas Shrugged" and "The Fountainhead. Copyright © 2009 Ayn Rand® Center for Individual Rights. All rights reserved.