The bright side of bankruptcy: a political fantasy

Bob Tippee

In the rush to make financially troubled companies wards of the US government, a strange misconception seems to be at work: that bankrupt entities cease to exist.

That's not so. Bankruptcy enables the hopelessly indebted to continue to function economically.

It's a drastic step. It shouldn't be taken casually.

Sometimes, though, it's inevitable. But the people involved don't vaporize. They get a chance to start over.

Imagine a politically implausible but possibly illuminating scenario in which the government rescued just one of the three big US automakers now pleading for bailout.

Politics would steer aid to the weakest. The move would force the second-weakest automaker into bankruptcy, leaving the other—presumably the strongest at the beginning of all this—to slog on unaided.

Creditors and shareholders of the bankrupt automaker would sustain varying degrees of financial loss. Depending on how serious the court proved to be about making the emergent company competitive, labor contracts would change, and there would be fewer levels of management, less lavishly compensated than before.

So there'd be hardship. But that word doesn't apply to the new inability of "workers" to claim wages for doing nothing under a job-bank program or managerial salaries with only six figures.

If everything went as it should, the US would have one more major automobile manufacturer able to compete than apparently it has now.

The new competition would be tough on the other two companies—toughest, probably, on the one that missed out on the first dole, formerly the strongest.

By then, the rescued manufacturer would have its own problems, such as abysmal sales of the unpopular "green" vehicles it had to make as a condition of aid.

So the government still would have to deal with automakers forced into jeopardy by chronic competitive disadvantages.

It would, in other words, face the same problems it has now, notwithstanding the expenditure of tens of billions of dollars or assumption of equivalent risk, but with two troubled automakers rather than three.

It's not hard to guess which of the original trio investors would, at that stage of the cycle, like best.

(Online Nov. 14, 2008; author's e-mail:

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