Bankruptcy, please

Continuing the previous discussion here and here about what should be done about the (formerly) "Big 3" automakers, the Editors at National Review offer their thoughts:

Bailout or bankruptcy? For General Motors, the answer is — yes. But mostly the latter.

There is no saving GM in its present state and no good argument for trying. It is currently losing $500 or more on every car it makes. As of 2007, it was paying its workers at a $20-per-hour premium over what Toyota was paying just down the road. It’s a company with terrible management, terrible unions, and not very many good products. Its shareholders already have been substantially wiped out; there’s very little left for them to lose.

Congress must be reminded to view GM as a car company. It isn’t a health-care provider for the state of Michigan or a federal jobs program, even though members of Congress talk as though it were...It’s not Congress’s business to evaluate business models.

We have a good, proven process for dealing with companies that have short-term cash-flow problems and valuable underlying assets, and that process is called bankruptcy. There was a reasonable (though not ironclad) case to be made that government intervention was prudent in the case of the bank failures because of the risk of a systemic crisis in the credit markets. There is no comparable argument for GM...

There is no shame in bankruptcy. It can be a good thing — dozens of companies have entered bankruptcy, reorganized their finances, and emerged stronger than before. Policymakers should endeavor to make use of the time-tested institutions we already have rather than invent new solutions — also known as "making it up as we go along" — whose unintended consequences we must later endure. We have 200 years of bankruptcy law behind us; our Constitution itself touches on the subject...

GM has real assets — by some estimates, the steel in its buildings is worth more than its current market capitalization of just under $2 billion. GM’s factories, distribution network, intellectual property, and inventory — as well as the expertise of its workforce — are all highly valuable assets. The United Auto Workers are keen on saving their jobs and the $70-an-hour paychecks that go with them, but GM’s payouts to UAW members are one of the major drains on the firm’s future, and a big part of why its market value as a company is less than the value of its buildings and other assets.

While we hope that most of the UAW’s members stay on the job — these highly skilled workers will be needed, whatever happens next — GM’s management has to go. Any taxpayer exposure should be contingent on the exit of every C-level executive from the company, at a minimum.

Shareholders have claims on GM. So do the UAW and its retirees, and so do creditors. The place to work out those competing claims is in bankruptcy court. GM and its taxpayer-funded lobbyist Debbie Stabenow — who moonlights as a U.S. senator — will come with their hands out, telling tales of global financial woe and talking rot about the Big Three’s being essential to national security. But GM isn’t in trouble because of the global credit crisis — it’s in trouble because it’s a poorly run company. If it is essential that American drivers have cars made in America by Americans, there are Toyotas rolling out of Kentucky. GM should roll into bankruptcy court.

As a long-time restructuring professional who has been hired as an interim CEO or consultant to take numerous companies through bankruptcy and other out-of-court restructurings, the only viable solution for companies in GM's condition is bankruptcy.

There is a myth that every bankruptcy equals a liquidation outcome. Simply not true. Think of a typical bankruptcy as a court-ordered timeout where the company is provided with protection and time to restructure its operations so they can become cash flow positive, profitable and therefore offer more reliable employment to the remaining employees.

Many companies do such restructurings on their own and out-of-court when market trends require changes in strategy or operations. Adapting to changing market dynamics is simply part of good management. And sometimes circumstances beyond management's control change so swiftly that a formal restructuring process like bankruptcy is necessary.

By contrast, the Big 3 have had opportunities for years to complete their respective out-of-court restructurings. Their key stakeholders - including both management and the UAW leadership - have all failed to get the job done.

Any government bailout would reward past bad behaviors by leaving the stakeholders - with their ongoing track record of failure - in positions of power. Why would anyone trust people who have blown through billions of dollars of cash and destroyed shareholder value with more billions of other people's money? They deserve to be kicked out, not bailed out.

A government bailout would also implicitly suggest that political power in DC can trump economic reality at the companies. Only politicians and incompetent executives would believe the dangerous illusion that economic reality can be wished away by legislation and funny money. A bailout is nothing but corporate welfare for powerful corporations.

A bailout would only serve to perpetuate the negative cash flow status quo, which would require further bailouts. Why? Because a bailout undermines incentives for real change, for key stakeholders to make the necessary hard decisions...and we have years of empirical proof that the necessary tough decisions never get made in Detroit.

The business model for the Big 3 is an outright failure. It must be blown up and rebuilt to be cash flow positive and profitable. It can be done; all you have to do is look at the numerous other auto makers in the USA to find auto companies who have cash flow positive operations.

Restructuring the Big 3 is not a job for Congress, any politicians, taxpayer's monies, or current management. It is a job for turnaround professionals, distressed investors, and a new set of industry professionals, people who know what has to happen now, who are not bound to legacy issues, and who bring a sense of urgency to the problems at hand. Only then will a genuine rebirth be possible.

(BTW, the next time CEO's fly to DC to beg for billions of other people's dollars, don't take your private jets. It is a wonderfully symbolic example of why they should all be given their walking papers.)

ADDENDUM

Expanding on the thoughts found in the two previous links at the beginning of this post, here are more thoughts -

Mitt Romney: Let Detroit go bankrupt
Rand Simberg: Want change? Let's try truly free markets
Don Boudreaux: 'Too Big to Fail' Gets it Wrong - Failure is vital for unproductive companies, especially the big ones
Megan McArdle: Right to work
Megan McArdle: Keep bailing...
Megan McArdle: Save the Rust Belt
Megan McArdle: Invidious Comparisons
Megan McArdle: Viewed from afar, it's lovely...
Acre of Independence: Saving Detroit - An investment in future failure
Jim Lindgren: A Simple Argument Against the Auto Bailout: A Bailout Would Destroy Jobs
Will Wilkerson: Failure - for our future
Will Wilkerson: I Find Myself Agreeing with My Own Assumptions More Often Than Not
George Will: In Detroit, failure's a done deal
David Yermack: Just say no to Detroit - Given the abysmal performance by Detroit's Big Three, it would be better to send each employee a check than to waste it on a bailout
Tiger Hawk: Do not bail out the Detroit Three
Jim Manzi: Two questions about the Motor City shakedown
Jim Manzi: Detroit - Same old, same old
Jim Manzi: That 70's show
David Brooks: Bailout to nowhere
Jennifer Rubin commenting on David Brooks: You mean he thinks government knows best?
Eric Torbenson: Why we shouldn't bail out the Big 3 automakers
John Derbyshire: Next Under the Bus: UAW? Or an auto-industry bailout?
Power Line: No UAW bailout
Don Boudreaux: Truer words were never spoken
Rodney Long: Corporations versus the market

ADDENDUM #2

On the broader, philosophical issues underlying the bailout debate, Victor Davis Hanson: Failure is not an option - Today it seems the grossly incompetent and inefficient must be preserved at all costs:

We all remember the advice about failure we received from our parents and teachers. "If at first you don’t succeed, try, try again." "Learn from your mistakes." "Failure breeds success."

The common theme was that some sort of failure in life is inevitable. It is a wake-up call for reflection — and should prompt needed change. Our character is not just built from success, but during setbacks as well.

But now Americans seem to think such folk wisdom is obsolete. First came the $700-billion bailout of the financial industry. Such a one-time federal guarantee was perhaps necessary to restore liquidity for the failed banking system, but it sent a terrible message.

Those who caused the mess — greedy traders, corrupt politicians, incompetent CEOs, and gullible stockbrokers — got a collective reprieve...

The teetering U.S. auto industry is now next in line for a multi-billion-dollar federal bailout. But for decades, Detroit made gas-guzzling automobiles that the public believed were not as well built as the Japanese competition — despite being made by unionized workers who were paid far more than those somehow building better cars. Will overpaid auto executives and workers worry about the consequences of their ongoing mistakes when the government has assured them that failing is not an option?

States and cities are lining up as well for fail-safe cash...

All sorts of promises are proposed to bail out mortgage holders who have defaulted or owe more than their homes are worth. Apparently, no debtor is really culpable. And apparently, no one took out second or third mortgages for optional consumer purchases, or bought homes too large for their incomes.

What is the lesson here for other pinched families who will not default and will somehow meet their mortgage obligations, even on homes with negative equity? Is it that those who pay what they owe are punished while those who fail to do so are excused?

President-Elect Barack Obama promised over $1 trillion in new entitlements at a time when the Bush administration may well run a $500 billion annual deficit, only adding to a $10 trillion national debt. We also have $50 trillion in federal unfunded liabilities, ranging from long-term promises to Medicare and Social Security to payouts for government bonds and guaranteed loans.

Such massive borrowing and guarantees all offer cover for insolvent or poorly run programs (that face no worry of running out of money — and thus have no incentive to change). Corporate farmers just learned that the current $288-billion farm bill will once again provide government subsidies to ensure that it won’t matter much whether they plant the wrong crop at the wrong time.

Universities raise tuition rates that exceed the rate of inflation. But in our brave, new no-failure world, why worry when more promised federal-guaranteed student loans and credits will ensure steady paying enrollment?...

Americans are creating a therapeutic society in which none of us need fail. No one loses in T-ball anymore. Schools honor a dozen valedictorians. In universities, a "C" passing grade is now the understood kinder and gentler version of the old and now-rare "F."

Our culture forgot that there was once a utility in failure. Failing reminded us of what works and what doesn’t — and how we must learn to avoid the latter. Instead, in our new economic purgatory, no firm, company, state, city, or individual ever quite goes to financial heaven or hell. A Bear Stearns or Chrysler neither succeeds nor fails but just sort of endlessly exists.

Russell Roberts: How to move the economy forward? Nobody knows - not even Obama:

President-elect Obama announced the other day that the government would do "whatever it takes" to revive the economy.

I suppose that made some people feel good. After all, who wouldn't want tireless effort in the face of a crucial problem?

Unfortunately, the problem with the economy isn't insufficient effort or focus. The problem is that no one knows what to do next...

If reviving the economy were like reviving a patient whose heart has stopped, then relentless effort would be the key...

But reviving an economy is more like parenting. There's no manual. If there were a parenting manual, every hospital would hand one out with every newborn. But there isn't a manual because each kid is different. And parents come to learn that they aren't really in charge. There's too much of the process they can't control. So great parenting isn't about doing whatever it takes. It's an art. It's about a set of principles and knowing which principle to apply in which situation. When to be tough. When to be soft. When to give a kid a do-over.

Even the most skilled parents make mistakes. Not because they don't understand what it takes to be a good parent. Not because they aren't committed to doing the job as well as it can humanly be done. But simply because there's no way of knowing what to do next.

Often what's called for in parenting is the exact opposite of whatever it takes--what's called for is doing nothing.

Welcome to the world of macroeconomics. Even the wisest president and most skilled secretary of the Treasury doing whatever it takes isn't enough if you don't know what it takes. And there's no way of knowing.

Look at poor Henry Paulson. He can't figure out what to do. But you think it's easy? To revive financial markets, he just has to create confidence and a desire to invest. Piece of cake. Alas, no one knows how to do it. And it isn't from lack of trying. Or desire. Paulson's successor will have one advantage Paulson doesn't have. He'll know something about what not to do. But unfortunately, that isn't enough.

After all the changes in policy and the uses of the TARP that have been announced in the last six weeks, I suspect that confidence and a desire to invest are no longer under the control of the Treasury secretary or the president. If anything, many of Paulson's relentless efforts to move markets forward have made the situation worse.

Obama may promise whatever it takes, but the unfortunate reality is that he faces the same situation that Bush and Paulson have been facing. We need confidence and optimism, but there's no way of knowing how to get there from here.

Obama's only practical suggestion has been to support the idea floating around Congress for a stimulus package of $100 billion or more.

That doesn't exactly meet expectations of doing whatever it takes. That's doing what we've already done.

We tried a $160 billion stimulus package last spring. That accomplished very little. What's the argument for spending $100 billion to revive a $14 trillion economy? A $14 trillion economy where the government has just spent a few hundred billion and counting on financial bailouts and capital injections. To no avail. Does anyone really think that we haven't spent enough?

What if markets are spooked by the specter of government spending without any constraints? What if doing whatever it takes means doing less, rather than more?

That is the conundrum for Obama and the successor to Paulson. The more options there are, the harder it is to know which one is the right one. The more options you try, the more uncertainty is injected into the economy, and the more cautious are investors and employers and consumers.

Nobody knows what it takes to move the economy forward right now.

Which is why policies which create the proper incentives for economic growth and then stepping back to let the marketplace unfold will always be a more productive course of action than direct governmental interventions by politicians and bureaucrats.