Do Conservatives Understand How Bankruptcy Works?
The news this morning that GM CEO Rick Wagoner has been asked to leave GM as a condition of GM receiving further federal money has led to a completely non-sensical (though predictable) spasm of criticism from conservatives. Michelle Malkin whines that Obama is playing "auto repairman-in-chief." Jonah Goldberg writes that "GM is now Obama's company" and snarks that "being a law professor and community organizer totally prepares you to run huge white elephant multinational corporations." Mark Steyn issues a dire warning:
Of course if you ask any of these people what should be done about GM and Chrysler, their answer is, inevitably, that they think the companies should be allowed to go bankrupt. But that just raises a more basic question: do conservatives understand what bankruptcy is?
When a company files for bankruptcy under Chapter 11 of Bankruptcy Code, it doesn't just disappear into a puff of smoke. The goal of a Chapter 11 bankruptcy is a reorganization of the company, and that reorganization process is overseen at every step by the government. Upon filing of the Chapter 11 petition, a federal bankruptcy judge takes jurisdiction and all important decisions from that point forward must by approved by the court. The officers and executives of the company are often replaced. Sometimes a trustee is appointed to run things. All sorts of business issues get litigated during the process. Eventually, if things go according to plan, a plan of reorganization is approved by the judge and the reorganized company emerges from bankruptcy.
In other words, bankruptcy is a process by which a company relinquishes ultimate control of its destiny and its operations to the government in exchange for protection from its creditors. It gives the government a veto power over everything. What the Obama administration is doing right now is no different in principle from what a bankruptcy judge does; they're just trying to do it outside of the formal bankruptcy process because they believe that doing so will minimize the harm to GM and the overall economy.
The claim that what Obama is doing represents some sort of unprecedented intrusion by government into the private sector is risible. It's not as if the Obama administration is trying to step in and dictate how a successful company is run. These are insolvent companies. The alternative is not laissez faire; it's formal bankruptcy, with a bankruptcy judge calling all the shots.
[T]his GM/Chrysler thing is bad. Really bad. The descent into corporatism will doom America: The government is not competent to pick winners and losers, and will mire us in long-term Continental-style economic stagnation if it persists.And Matthew Vadum of the American Spectator warns that there is a "whiff of fascism" to Obama's move and that he is engaged in an "assault on American capitalism [that] is unprecedented."
Of course if you ask any of these people what should be done about GM and Chrysler, their answer is, inevitably, that they think the companies should be allowed to go bankrupt. But that just raises a more basic question: do conservatives understand what bankruptcy is?
When a company files for bankruptcy under Chapter 11 of Bankruptcy Code, it doesn't just disappear into a puff of smoke. The goal of a Chapter 11 bankruptcy is a reorganization of the company, and that reorganization process is overseen at every step by the government. Upon filing of the Chapter 11 petition, a federal bankruptcy judge takes jurisdiction and all important decisions from that point forward must by approved by the court. The officers and executives of the company are often replaced. Sometimes a trustee is appointed to run things. All sorts of business issues get litigated during the process. Eventually, if things go according to plan, a plan of reorganization is approved by the judge and the reorganized company emerges from bankruptcy.
In other words, bankruptcy is a process by which a company relinquishes ultimate control of its destiny and its operations to the government in exchange for protection from its creditors. It gives the government a veto power over everything. What the Obama administration is doing right now is no different in principle from what a bankruptcy judge does; they're just trying to do it outside of the formal bankruptcy process because they believe that doing so will minimize the harm to GM and the overall economy.
The claim that what Obama is doing represents some sort of unprecedented intrusion by government into the private sector is risible. It's not as if the Obama administration is trying to step in and dictate how a successful company is run. These are insolvent companies. The alternative is not laissez faire; it's formal bankruptcy, with a bankruptcy judge calling all the shots.
posted by A.L. at 2:05 PM
28 Comments:
wow, great post, I really didn't know how bankruptcy works (outside of the boardgame 'life'), so I wasn't a huge fan of this move either. I'll probably look up some more info on bankruptcy, but at least this got me to think about it.
I'm no fan of Malkin to be sure, but the racism of the anonymous post of 3:38 pm is disgusting and has no place here.
Wow, that was easily the most racist comment I've ever had anyone post here. I've deleted it, which is something I almost never do. Whoever that anonymous poster was, please don't come back.
Not sure you fully understand bankruptcy either. The purpose of a bankruptcy is to maximize the value of a company for its creditors, plain and simple. The purpose is not to rescue the company. In fact, before a company can emerge from bankruptcy, it needs to prove that it is worth more as a going concern than if it is liquidated.
The main thing people need to know about GM going into Chapter 11 is that once it does this, neither it nor the Obama Administration is in control. Things might work great, and in 6 months it can emerge with a new capital structure that at least gives it a chance of survival.
But plenty can happen along the way, and remember, every decision will be evaluated as to whether it benefits GM's creditors, not its effect on the economy, or its effect on communities.
oh, didn't mean for that "I'm not sure you undertsand bankruptcy..." remark to come off as snarky as it did. Sorry about that.
az,
No need to worry about snark. I have thick skin. I assure you, though, that I'm very familiar with the bankruptcy process. My point was not that re-emergence from bankruptcy is the ultimate objective, but merely that the government (in the form of the court) plays a major role in all decision making in bankrupty, including, as you point, whether the company ultimately lives or dies.
Also, I think your point cuts in favor of Obama. One of the reasons for trying to do this outside of formal bankruptcy is that the government CAN consider the impact on the overall economy as a factor in its decision-making, something it would not be allowed to do in a bankruptcy proceeding, where maximizing value to the creditors is the sole objective.
But that just raises a more basic question: do conservatives understand what bankruptcy is?
Yes.
What the Obama administration is doing right now is no different in principle from what a bankruptcy judge does; they're just trying to do it outside of the formal bankruptcy process because they believe that doing so will minimize the harm to GM and the overall economy.
It is completely different. Neither a legislature or Congress gave Obama the authority to do this. How could anyone who claims Bush overstepped his constitutional authority approve of what Obama is doing?
It's not as if the Obama administration is trying to step in and dictate how a successful company is run.
We'll see. I hope you're right.
It is completely different. Neither a legislature or Congress gave Obama the authority to do this. How could anyone who claims Bush overstepped his constitutional authority approve of what Obama is doing?
Steve, first, the loans in question were given by the Bush administration, not Obama. The Bush administration had the authority under existing law to issue those loans and to condition the issuance of those loans on GM and Chrysler doing certain things. If the government has the power to give emergency loans, it certainly has the power to conditions its giving of such loans.
Obama is merely telling these companies that they haven't fulfilled the conditions Bush put on the loans and that they have a very limited time to rectify the situation before they are cut off and forced to enter bankruptcy.
AL,
The first sentence in your post is the issue, that Obama, in effect, fired Wagoner. Not via bankruptcy court, where the law might allow for a judge to do such things, but outside of the law. I realize I'm arguing over process, but it's the process that is important. A judge doesn't have to worry about being re-elected, and does not turn a bankruptcy into a political game as a President would and could. There is too much temptation for a politician to pick and choose which companies survive, and that decision could be based entirely on motivations not available to a judge (a political contribution vs. a bribe).
If the government has the power to give emergency loans, it certainly has the power to conditions its giving of such loans.
I would challenge that it actually did. If you remember, this came out of TARP money, originally meant to by up toxic assets; this was what was written in the law. But then Paulson, and subsequently Geithner, paid banks directly. Most conservatives considered it wrong for the government to use this money for the banks, let alone the automakers. As far as I know, nobody has challenged that either administration was actually allowed to give any of this money to automakers absent an appropriation from Congress.
Remember also that while Treasury was run under Paulson, many banks were forced to take TARP money even if they didn't want it. Now we have Geithner and Obama talking about how they want to add in "regulations" for all financial companies, those that took TARP money, and those that didn't. This goes way beyond the economy.
It seems to me that there are two issues here. The first is whether one thinks that Obama will do a “better job” of reorganizing GM than would a bankruptcy proceeding. As AL says, there is nothing that suggests that Obama will restrict himself to the criteria that would be relevant in bankruptcy. One way of looking at that is to say that Obama can protect the broader interests of the economy, rather than just the interests of the company and its creditors. Another way of looking at it is that Obama has assumed the power, without any delegation from Congress, to benefit some interests at the expense of others, for whatever economic, social or political reasons he may choose. AL, of course, trusts Obama to exercise this power wisely. Not everybody does.
The second issue is whether this sets a dangerous precedent, even if you think that Obama’s intentions are good. If George Bush were president, would you want him firing company executives when he thought it was in the national interest to do so? How about if he decided that the war on terror mandated that he seize a private business to keep it from going into bankruptcy? How about if he seized the business to break a strike?
Regardless of where one comes down on these issues, it is silly to say that conservatives don’t understand bankruptcy because they are complaining about Obama’s actions. You can claim a bankruptcy judge is “the government” (which is not exactly the normal use of the term), but that word game is meaningless. If a judge and the President are both “the government,” I guess it doesn’t matter which one authorizes a wiretap either, right?
MLS,
What a load of nonsense. My primary point--which you go to great lengths to ignore--is that the conservative peanut gallery is complaining about non-business people intervening in business decisions (i.e. government politicians and bureaucrats interfering with private industry). My point was that that is a stupid criticism because that's exactly what happens in bankruptcy anyway.
Second, Obama isn't doing anything remarkable here. He's simply imposing conditions on the further granting of federal money (indeed he's just enforcing the conditions Bush imposed when he originally granted the loans). And if you read his statement today, it's pretty clear that the end game here is a controlled bankruptcy. Normal chapter 11 bankruptcy isn't feasible right now because there's no one willing to provide debtor-in-possession financing. So the only way to complete a reorganization of GM (which should be the goal here) is for the government to provide the financing in a sort controlled bankruptcy scenario. That's in everyone's best interest and is far preferable to the chaotic liquidation that would likely result from a chapter 11 and lead to a cascade of bankruptcies of suppliers and dealers.
GM isn't just a mom and pop store. It's bankruptcy would have massive ramifications and would be extraordinarily complex. It needs to be managed and not just allowed to happen haphazardly. The economy is too fragile for GM to just implode. The responsible thing to do is to try to manage the restructuring process to minimize disruption to the economy and give GM the best chance of emerging on the other side as a viable entity. If you want to pretend that this is some sort of "dangerous power grab" feel free, but that's just not very accurate. Obama inherited a complex and difficult situation and he's dealing with it in a responsible, serious way.
Steve: Banking is a bit off-topic, but the idea that there are banks which took but honestly didn't want the TARP capital is ludicrous. Many truly healthy small banks didn't take it. Wells Fargo et. al. took it because they needed it, and Paulson was kind enough to give them some political/investor cover by acting like he was ramming it down their throats. Try to read beyond what the articles based entirely on corporate and government sources tell you. If you read the most recent Wells Fargo financials you can see that the company is barely solvent WITH the TARP capital. In this environment, do you really think that banks with massive bad debts and solvency worries will turn down government backing through 5% capital for 5 years? If the bank is so healthy, why did they sell new common shares in the fall and massively cut the dividend? Of course management says they didn't need the capital - but if that were true they would have put up a bit more of a fight, don't you think?
I say all this as a WFC investor, so I'm not talking my book - the risk/reward is so asymmetrical that I'm willing to take it, but I never would have invested in a large bank without the huge bailout on favorable terms.
mls: The difference between GM and your hypothetical situations is that GM management came to the government begging for money to stave off bankruptcy. When you need someone's investment to continue operations, you follow the terms of their investment. If you can stand alone, you stand alone.
"But that just raises a more basic question: do conservatives understand what bankruptcy is?"
Actually, it raises another more basic question - are you able to avoid absurd and offensive generalizations?
Seriously. Barbra Streisand is a liberal in good standing. Do you think she understands bankruptcy?
And I can find roughly a million (OK, a gazillion) conservative lawyers and academics who understand bankruptcy inside and out.
If you want to ask whether the specific group or conservative writers you cited understand bankruptcy, fair enough.
Fraom am AL comment:
My primary point--which you go to great lengths to ignore--is that the conservative peanut gallery is complaining about non-business people intervening in business decisions (i.e. government politicians and bureaucrats interfering with private industry). My point was that that is a stupid criticism because that's exactly what happens in bankruptcy anyway.
Uh huh. It's exactly what happens in bankruptcy per established procedures that have been tested in the courts for decades. This seat of the pants, maybe its legal stuff was clearly unacceptable to Dems when the argument was that there was a war on, yet now its fine.
Try this - Do liberals even understand wiretapping? Don't they understand that when a FISA judge approves a wiretap it is being condoned by the government, just as when Bush orders it? How stupid are these people, and don't they know there is a war on?
Well. If bankruptcy judges can run for national office on the basis of their decisions this notion of "judges, elected officials, so what, its all the government" will have more force.
And FWIW, I thought the Lehman bankruptcy was a ghastly mistake and a GM bankruptcy would be worse, so I don't have a problem with what Obama is doing.
Tom Maguire
Actually, it raises another more basic question - are you able to avoid absurd and offensive generalizations?
...
If you want to ask whether the specific group or conservative writers you cited understand bankruptcy, fair enough.
Tom, isn't it pretty obvious that I'm using "conservatives" as short hand for the "specific group of conservative writers [I] cited"? Were you really confused about that?
Obviously I don't believe all conservatives are Malkin-esque morons. You're not. I work with several very smart conservatives. But when you write a blog post, you often have to speak in generalities to make your point (a practice I know you're very familiar with, because I read your blog).
There are lots of smart conservatives. But when I click on memeorandum, it is dominated by the Michelle Malkins of the world, and they really don't know their asses from their elbows. It's that particular know-nothing crowd that I'm referring to.
Do liberals even understand wiretapping? Don't they understand that when a FISA judge approves a wiretap it is being condoned by the government, just as when Bush orders it?
You would have a valid point if the liberal criticism was that govt should not be wiretapping. That was not the liberal position.
The liberal position was that Bush violated the law of the land (FISA). And he broke the law repeatedly (not just occasionally when the situation was critical). And he broke the law deliberately.
This exact conversation happened yesterday when my conservative brother-in-law from MI called to chat with my husband. He's unhappy with Obama getting involved with GM. If they can't compete anymore, he just wants them to go bankrupt.
I was hollering in the background "Does he know who gets involved when you go bankrupt?"
I am curious as to why those that would criticize the Obama admin for asking Wagoner to leave before further funds go into restructuring GM did not feel the same outrage and "facist" sentiment about the Bush admin doing the EXACT SAME THING to Freddie Mac, Fannie Mae and AIG in 2008??
Tom,
I haven't read you in years. You're still an idiot conservative. As a conservative you bring up how Barbra Streisand is such a liberal who doesn't understand bankruptcy the way conservatives do. Never mind that she's never said one word about it - you simply lie about it. Then you get your conservative panties in an uproar about how you're such a conservative victim because some conservative lawyers might actually understand bankruptcy.
Waah waah wahh. You conservatives are absolutely sick. A good start would be to see a few conservatives rotting in jail for what your lot has done to my country.
Neither liberals nor conservatives, for the most part, understand anything at all about economics.
It is very easy to find conservatives ranting about this sh#t in a completely inaccurate way. It is also very, very easy to find liberals ranting about it with absolutely no clue.
This isn't a conservative v liberal thing, its an 'our society is pretty much too dumb to live' thing.
Of course they know what filing for Chapter 11 means. They just want to throw more mis-information into the news cycle in the hopes that some of it will stick. Thanks for the simple and explicit recitation of the the reorganization process. Non-lawyers don't necessarily know this stuff.
PLH, Esq.
Understand the major point that GM's undergoing a de facto bankruptcy- looks much like an 11 proceeding- a point not understood by many.
However SteveIL raises a legitimate separation of powers concerns. No doubt that a federal BK judge is vested with the power to undertake a Chapter 11 reorg, probably under a Congressional grant (as BK judges do not have lifetime terms as I recall.)
I'm thinking legitimate legal questions exist as to whether the executive branch has/should have this power vis-a-vis its Constitution grant. The executive branch's methodology may be more efficacious- but it doesn't necessarily mean that it's constitutional. The extraordinary events of the past year have raised many constitutional concerns- most of which seem academic compared to the immediacy of the problems we face.
So maybe Barack Obama can start legislating from the Oval Office too. Then when people complain, you can say that they just don't understand what legislation is.
Obama would just be doing what the Congress does, but it's easier than leaving it to them.
I see some people are still unclear on the bankruptcy concept vis a vis the courts.
A bankruptcy court can nullify a debt or enforce under penalty of law an agreement to reduce the amount of money owed. Obama clearly cannot do this, and is restricted to suggestions and conditions attached to money to be loaned.
If you want to be concerned about power grabs, you might look at what the Federal Reserve has done under that obscure New Deal era law to bail out AIG.
Yeah, OK, let's see. Were all of you folks yelling "SOCIALIST!" at Obama over his influence at GM yelling just as loud over the government's influence over the various executive bonuses a week or so ago? So, we SHOULD be able to tell a private corporation that their executives can't get the bonuses that we believe are too high, but we SHOUDN'T tell GM that an inept CEO should leave if they want any MORE public money than what they've already received (and of course, the guy can stay head of GM if they DON'T want' any more of our money).
No, that's not really a hypocritical point of view or anything...
"Were all of you folks yelling "SOCIALIST!" at Obama over his influence at GM..."
I think you've got the wrong guy.
"... yelling just as loud over the government's influence over the various executive bonuses a week or so ago?"
Yep.
Shameful, especially when it came out that everybody knew and were just playing outrage theater.
"So, we SHOULD be able to tell a private corporation that their executives can't get the bonuses that we believe are too high..."
Nope.
"but we SHOUDN'T tell GM that an inept CEO should leave if they want any MORE public money than what they've already received (and of course, the guy can stay head of GM if they DON'T want' any more of our money)."
Define "we", and make it Constitutional.
"No, that's not really a hypocritical point of view or anything.."
Right you are.
i wonder, steveil, how do you type out your replies with that boot on your neck?
make it Constitutional.
Funny I did not hear the right wingers raise the constitutional issue the last time a retroactive bill was passed.
The bill which dealt not retroactively taking away the right of Americans to sue the telcos who violated their rights.
IIRC, the right wing was hung ho cheering for that piece of retroactivity.
Late response, but here's the point in a nutshell:
Those conservatives who want to let the corporations fail know exactly what they're saying. They have only one goal: Destroy the unions.
If a company goes Chap. 11, their contracts with other companies and organizations get re-negotiated (or just thrown out the window). GM goes bankrupt, and all those workers who have any job security, guarantees of safety while on the assembly line, or living wage are screwed. The company can just decide to hire non-union workers at much lower pay and minimal benefits.
With Michigan unemployment at 12%, there are lots of people who have been out of work for so long, they're desperate and will take those jobs.
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