The best option for General Motors and Chrysler, if they can't cut deals with the union and bondholders, is a fast "surgical bankruptcy," say Obama officials. Is it possible?
The answer is a qualified "yes." While government money can grease the bankruptcy system pretty well, the government's involvement could blunt a key dynamic of reorganization -- restoring the automakers' competitiveness.
While some bankruptcy cases drag on for years, many big companies have been in and out of court in several months. The key in these cases was to reach agreements with as many stakeholders as possible before filing.
In its purest form, this is known as a "prepackaged bankruptcy." The company knows exactly what it wants and has won advance agreement from possible challengers in court.
GM and Chrysler are farther along than most companies on the eve of filing. The two have worked on bankruptcy plans for years. Since hitting the brink of insolvency last year, government money has bought GM and Chrysler time to negotiate, work through sticky issues and fine-tune their plans. For most businesses on the verge, that respite would be a luxury.
Major issues do remain: union agreements, "cramdowns" and equity swaps for bondholders, and retiree benefits. But the companies -- GM in particular -- have made progress whittling down the areas of disagreement and sketching out terms that could be imposed in court.
Thanks to all this planning, a GM or Chrysler bankruptcy case will not be anywhere near as complex or contentious as expected. That augers well for a fast trip through the courts.
So, too, does government financing. The Obama administration, while talking tough, has all but committed itself to providing tens of billions of dollars in bankruptcy financing, eliminating an often tricky piece of the reorganization puzzle. Without having to seek privatemoney or scale down ambitions, the automakers will avoid major stumbling blocks that have kept other businesses in bankruptcy for extra months or years.
But getting in and out of court as quickly as possible is not the goal of reorganization. The real goal is to turn these companies around and return their vast resources -- their workers, technology, facilities and infrastructure -- to the highest possible use. If GM or Chrysler emerges from bankruptcyand staggers along for a few more years, shedding jobs and market share, that would be no victory.
Government funding threatens to undercut a chief virtue of reorganization in bankruptcy: discipline. Companies that face the real threat of failure, without Uncle Sam to bail them out, have to be bolder and more aggressive. They can emerge from the process leaner and meaner competitors.
A big bailout that blunts the discipline of bankruptcy would be counterproductive to Detroit's long-term health.
A faster trip through the courts is better than a slower one, and there will always be the risk that even a fast-track case could get bogged down. But focusing on speed ignores the greatest risk of all: That the long decline of America's automakers will continue at enormous cost to auto workers, the economy and taxpayers.
Andrew M. Grossman is Senior Legal Policy Analyst in the Center for Legal and Judicial Studies at The Heritage Foundation.
First appeared in The Detroit News