NCPA - National Center for Policy Analysis


November 18, 2008

Is a $50 billion government bailout of the auto industry's Big Three the answer to its problems?  President-elect Barack Obama and House Speak Nancy Pelosi think so, but there is a better solution: bankruptcy, says Investor's Business Daily (IBD).

Filing for Chapter 11 protection under bankruptcy law is the normal way a company stays in business when facing an unmanageable financial situation.  It keeps creditors at bay while the company reorganizes under court supervision and settles its debts, and frees companies from union contracts.  But this could be why Democrats have taken the option off the table?  Possibly, says IBD; it's clear that a bankruptcy process would be rough going for the United Auto Workers (UAW):

  • During the last round of contract talks in 2007, the average hourly costs were over $70 at all three of the domestic automakers, compared to about $48 for Toyota.
  • Detroit has made progress dealing with the funding of health care for retirees, but its unionized plants still put it at a disadvantage to foreign rivals which run lower-cost, nonunion operations.
  • The union's membership has fallen from 1.5 million (1979) to 465,000 (2007); it would no doubt fall further if Detroit goes through Chapter 11.            

However, saving a shrinking union is the worst reason to bail out Detroit with taxpayer money, says IDB.  Moreover, there are legitimate caveats against standard issue bankruptcy.  The automakers' obligations may be too large for any private parties to extend them debtor-in-possession financing while they're in Chapter 11. Also, they have a valid concern that customers might not want to buy a car from bankrupt companies.

But even if some federal loans or loan guarantees can't be avoided, Washington needs to make Detroit's experience as close to Chapter 11 as possible.  Some suggestions: zero out the equity investors, replace management, shut down surplus dealerships and force the UAW to face the fact that its good old days are gone forever, says IBD.

Source: Editorial, "No UAW Bailout," Investor's Business Daily, November 14, 2008.


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