The top executives at General Motors, Ford and Chrysler have been going to Washington, begging for a rescue and saying their business would be devastated by a Chapter 11 filing.
I believe it, but compared with what?
Bankruptcy is never a first choice, but it's great for slashing debt, realigning operations and giving stakeholders their day in court. It also has a pretty fair record of reviving a failing business, although second-chance success is never guaranteed.
It's notable that while GM, et al, were campaigning to avoid bankruptcy, the Tribune Co. practically jumped into its arms Monday morning. The media giant moved early, hoping to have more sway over its restructuring, which is a common tactic among companies on the edge.
"Reorganizing with Chapter 11 is swift and severe," said bankruptcy expert Jack Williams, resident scholar of the American Bankruptcy Institute. "But you have a much better likelihood of a viable enterprise going forward."
Most Chapter 11 filings never get confirmed, and the companies are closed or liquidated, according to academic studies. But of those that complete the process, most improve their operating performance significantly because they reduce debt burdens and sharpen their focus.
Chapter 11 was a good stop for Delta and Continental airlines, as well as Macy’s, Texaco and others.
Much of the congressional testimony and public rhetoric about an auto bailout has centered on preserving 4 million jobs in the industry — or losing them all.
That is a false choice, because the U.S. auto business is shrinking, not disappearing. Yet the auto companies and their supporters often put the issue in stark terms.
Do we want to abandon auto manufacturing and all the people and companies connected with it? Of course not.
But Detroit automakers will close factories, lay off thousands, eliminate dealers and cut employee benefits even if they get billions in government loans. They've already unveiled such plans, hoping to convince Congress that they have a path to profitability.
So serious, deep pain is coming to the industry one way or the other.
This is not a choice between liquidation and a federal rescue; it's about choosing the best way to help failing giants make the changes that are needed to survive.
The debate should be between restructuring with Chapter 11 and restructuring without it. And because Congress plans to play a pivotal role, let's add a third category: restructuring with Washington as overseer.
We're apparently headed for the Washington option, as congressional leaders say they're ready to move on a $15 billion loan to GM and Chrysler, with billions more to be requested later.
A car czar and review board are in the works, which means that we're replacing the bankruptcy process with an ad-hoc hybrid. This could be a mess, considering the learning curve and special interests.
It's easy to imagine lawmakers insisting that jobs be maintained in their districts or that benefits remain unchanged. And the rescue could become laden with goodies for green vehicles and such.
Should the car czar be an expert in auto design and operations? Or a pro at discharging debt, getting creditors in line and reworking employee contracts?
In Washington — or in an out-of-court restructuring — the process could become an endless negotiation with dealers, employees, suppliers and more. In bankruptcy, all parties are given a priority status, which allows the judge to limit objections and speed up the proceedings.
"We have an economically effective, efficient system, with judicial oversight," Williams said about Chapter 11. "A bankruptcy brings transparency and relative certainty to all the stakeholders."
Auto executives say the simple act of filing for Chapter 11 would crush car sales because buyers would be put off by the uncertainty. But how confident can they feel about Detroit right now?
Paradoxically, companies often embrace bankruptcy to bring some certainty to their business.
Suppliers are again willing to extend terms, and lenders are more agreeable, because they're assured of being first in line to be repaid.
Chapter 11 also lets others, rather than management alone, propose a reorganization plan. In some bankruptcies, five plans have been submitted.
Maybe that's another reason that GM and Chrysler execs are so opposed to Chapter 11. They figure they have more influence in Washington than in bankruptcy court.
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