Chapter 15
While watching the Sunday morning news talk shows, I was struck by a
certain disconnect. On one hand, you have people (such as Senator
Shelby) who don't want for the government to give a blank check to the
auto companies, that their needs to be extremely strong oversight, but
they were unwilling to give specific examples of what kind of oversight
might be sufficient. For them, bankruptcy for the auto companies is a
better option. On the other side you have people like Senator Levin who
believe that a bailout is absolutely essential, but who really don't
understand the need for strict oversight. Even so, both of them were far more helpful than
Gettelfinger, the chief of the UAW. Yesterday he commented that workers had
made enough concession and no more would be agreed to. Apparently,
Gettelfinger has about the same level of attachment to reality that is
typically seen in psychiatric wards.
The roundtable discussion later on in Meet the Press was more helpful, but only to a point. Tom Friedman was on it, again doing his best Bob Seger impression (coming up with an insightful catch phrase and then relentlessly beating it into the ground). Katty Kay of BBC was a bit more in the middle, talking about the need of a bailout which was simultaneously very punitive for those in the auto industry (both workers and management).
As usual, both sides are right and both sides are wrong. The oversight for the financial bailout has so far been mainly illusory; nevertheless, a bailout was, and remains, necessary. The question is what is the best structure for the bailout that meets all the necessary goals. Bankruptcy might be a good option, but Chapter 11 bankruptcy will not allow the influx of cash necessary to keep the auto makers open. So the bankruptcy courts are not the best option, at least not as bankruptcy jurisdiction currently exists.
Perhaps the best option then is a dramatic expansion in the jurisdiction of the bankruptcy courts. An entire new set of cases could be given to the bankruptcy courts (the jurisdiction to be created in a new Chapter 15 of the Bankruptcy Code). The bankruptcy courts can, and I believe should, administer the bailout. The advantages are huge:
The roundtable discussion later on in Meet the Press was more helpful, but only to a point. Tom Friedman was on it, again doing his best Bob Seger impression (coming up with an insightful catch phrase and then relentlessly beating it into the ground). Katty Kay of BBC was a bit more in the middle, talking about the need of a bailout which was simultaneously very punitive for those in the auto industry (both workers and management).
As usual, both sides are right and both sides are wrong. The oversight for the financial bailout has so far been mainly illusory; nevertheless, a bailout was, and remains, necessary. The question is what is the best structure for the bailout that meets all the necessary goals. Bankruptcy might be a good option, but Chapter 11 bankruptcy will not allow the influx of cash necessary to keep the auto makers open. So the bankruptcy courts are not the best option, at least not as bankruptcy jurisdiction currently exists.
Perhaps the best option then is a dramatic expansion in the jurisdiction of the bankruptcy courts. An entire new set of cases could be given to the bankruptcy courts (the jurisdiction to be created in a new Chapter 15 of the Bankruptcy Code). The bankruptcy courts can, and I believe should, administer the bailout. The advantages are huge:
- Coersion: A bankrutptcy court can force companies to do things they couldn't normally do. The union contracts need to be torn up. Ditto for upper management. A special master can be hired to enforce best business practices at different levels of the company.
- Supervision: It is in the core institutional competency of the bankruptcy courts to oversee companies which are doing badly. In constrast, a board of oversight is attempting to create the procedures of oversight from nothing at all, without institutional knowledge of how it should be done. In bankruptcy courts, there are established procedures for ferreting out accounting and other malpractices hidden deep within the company books. This way, the bailout money can go directly to where it is needed.
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In his column today, Robert Samuelson makes many of the same comments I did above; he even says
..., although he does not explicitly call for bankruptcy court to administer the bailout.
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/16/AR2008111601734.html
November 17, 2008 7:31 AM | Reply | Permalink
Smart blog. Now off-topic... you're from Texas but living in Michigan? Lansing? Me too. Do you know about the Obama supporters/next steps gathering at Gone Wired on Thursday?
November 18, 2008 3:46 PM | Reply | Permalink
No. What time is it at? If it's in the evening I'll go.
November 19, 2008 11:55 AM | Reply | Permalink
yep, it's at 6:30 pm
Gone Wired Cafe
2021 East Michigan Ave
Thursday, 20 Nov 2008, 6:30 PM
November 19, 2008 2:17 PM | Reply | Permalink
Thanks. I'll see you there.
November 19, 2008 2:33 PM | Reply | Permalink
I think this is the first Frog Leg blog I have seen, though your comments are usually as insightful. I'll certainly look for future installments.
I totally agree with both your summation of the communications and systems dysfunction keeping us from succeeding with these efforts as well as using bankruptcy courts having the needed expertise and authority to handle these corporate meltdowns. It is the only way to add an element of unarguable accountability to the process that throwing gobs of money under the existing regulatory structures makes next to impossible.
First step is getting past all the special interests on the right and left in order to allow a measure of common sense based on common interests to dictate our strategic vision.
November 17, 2008 8:22 AM | Reply | Permalink
Thanks Jason,
I've posted quite a bit before, but it's been a while that I've done a substantive post.
Getting past the ideologies of left and right is what Obama is supposed to be all about. I hope we see that soon.
November 17, 2008 1:16 PM | Reply | Permalink
I think we have seen it already. The hard part will getting the party faithful on both sides to back off. Americans seem to love a good fight, even if it keeps us from fixing anything.
November 18, 2008 7:13 AM | Reply | Permalink
Definitely. Hopefully people will realize this is not the Patriots vs. Giants; we need win-win solutions for this country, even if there is no drama.
November 18, 2008 9:30 AM | Reply | Permalink
The real constraints that hamper the auto industry is that they are, in the main, publicly traded companies. Why so, you ask? Because publicly traded companies are in the main, required to get their stockholders the best return that they can on their investment. This doesn't include hedging their bets against all of the 'what-ifs' that may happen (for instance, high gas prices making their vehicles nearly unsellable), so that they are legally constrained to produce what used to make money until it actually doesn't, anymore.
What solves this problem? LEGISLATION, AND ONLY LEGISLATION. Then they are constrained by law to make what is necessary, as are their competitors, thereby absolving them of the 'legal mistake' of making what's needed, rather than what used to be the most profitable.
The problem? Our congresscritters haven't had the guts to pass that type of legislation, and the White House boobs haven't had the decency to allow California to set their own rules, the useless shits.
November 17, 2008 8:52 AM | Reply | Permalink
Legislation is good, but only up to a point. Here you need an entity that is good at managing at the micro-level. The governmental entity in the best place to do so is the bankruptcy court.
November 17, 2008 1:17 PM | Reply | Permalink
Excellent blog. Isn't it ironic that, once again, corporations seem to get better bankruptcy protection than persons?
But in the end it's the suffering of persons we need to be most concerned about. And certainly persons will suffer if GM goes totally bust.
November 17, 2008 12:35 PM | Reply | Permalink
The consequence of expanding the jurisdiction -- where? in Congress. when? no one sez -- of the bonkruptcy courts would be a mound of cases and a backlog which would take years for the courts to work through.
Verdict: Sounds good, won't work within the time constraints imposed by reality.
Shelby is from one of those states that get more back in Federal tax dollars than they pays in: ergo, he can sit down and STFU, regardless how anxious he is that the dollars AL gets will instead go to Detroit.
It isn't actually all that complicated: give them the loan/"bailout" and DICTATE by means of regulation how the money SHALL be used.
1. Up CAFE standards.
2. Research replacing internal combustion engine.
November 17, 2008 12:57 PM | Reply | Permalink
The legislation to increase the jurisdiction of the bankruptcy courts would ordinarily take time, but there is no reason to expect it should take any longer than a well-structured bailout would.
The problem with admin regulation is that admin agencies are not typically well-equipped to do the type of micro-management necessary. On the other hand, this is the expertise of bankruptcy courts.
November 17, 2008 1:11 PM | Reply | Permalink
For one, enacting legislation to increase the jurisdiction of the court is in effect a reversal of the recent bankruptcy "overhaul," which took YEARS to accomplish, in large part because the unelected Congress of Lobbyists had to have final say.
For another, a well-structured bailout would be much quicker because it wouldn't be confronted by lobbyists across-the-board. And it wouldn't be expected to last for decades.
As for administration micro-management: they are typically well-equipped to do so because in the main that is precisely their purpose: to micro-manage.
As for "expertise": bankruptcy courts do not do "bailouts," and that is not their expertise. An emergency bailout, legislative, narrow and specifically directed as to specific purpose/s, is the most likely and efficient approach.
And gain, last but not least: to expand the jurisdiction of the bankruptcy courts is to expand their caseload.
November 17, 2008 2:08 PM | Reply | Permalink
It really doesn't reverse the bankruptcy overall of a few years ago; that overhaul was almost entirely for personal bankruptcy, not corporate bankruptcy.
It is true that the bankruptcy courts do not have specific expertise in doing bailouts; however, on this scale, neither does any other entity. What the bankruptcy court brings to the table is the ability to micro-manage; this takes both knowledge and flexibility that bureaucrats would not have.
November 17, 2008 2:27 PM | Reply | Permalink
Chapter 15 bankruptcy appears to be for cross-border proceedings. How would you apply it to GM and how does it work?
Unless there is something special about Chapter 15, I don't believe bankruptcy will help. From what I have read, reorganization under a bankruptcy filing is not an option for auto manufacturers because of their heavy dependence on outside suppliers. The only bankruptcy GM could take would be Chapter 7, which would mean liquidation.
Chapter 11 would not work because of the need for credit to pay suppliers. Credit is hard enough to get these days even without being under the protection of a bankruptcy court.
Full disclosure: I have a relative who works for a GM dealership, which has been laying off people by the handfuls in the last month. I am pulling for help from the government.
November 17, 2008 6:00 PM | Reply | Permalink
I did not mean Chapter 15 literally--I was unaware it existed. I meant to advocate for an entirely new chapter of bankruptcy law.
November 17, 2008 6:14 PM | Reply | Permalink