Does the Press Corps Understand What Bankruptcy Is?

In this morning's Los Angeles Times, there is a "news analysis" piece with the headline "Obama takes step over the line that separates government from private industry." Here's an excerpt:

President Obama's plan to save failing U.S. automakers -- and make them the instruments for creating a cleaner, greener transportation system -- marked a major step across the line that traditionally separates government from private industry.

His announcement Monday of a new position on bailing out Detroit went beyond a desire to be sure tax dollars were not wasted in bailing out struggling companies. It put the Obama administration squarely in the position of adopting a so-called industrial policy, in which government officials, not business executives or the free market, decided what kinds of products a company would make and how it would chart its future.

His automotive task force concluded, for example, that the Chevy Volt, the electric car being developed by General Motors Corp., would be too expensive to survive in the marketplace. It declared that GM was still relying too much on high-margin trucks and SUVs, and that Chrysler's best hope was to merge with a foreign automaker, Fiat. Judgments like those are usually rendered in corporate boardrooms or announced in quarterly reports. But this time they were coming directly from the White House.

The notion that it was the president, not car company executives, who would pick such a course drew immediate criticism, especially from conservatives.

Ugh. Where to begin. First, it's probably worth pointing out that if there was a line that was crossed, it was crossed in December by the Bush administration. In December, before Obama took office, GM and Chrysler were given federal emergency loans on the condition that they come up with plans to radically restructure themselves in a way that was satisfactory to the government. Obama didn't make that call. Bush did. All Obama is doing is following through on that arrangement. Like the Bush administration, he's telling the automakers on what conditions they will continue to receive federal money. He only has three options: 1) cut off the automakers, 2) give them more money with no strings attached, or 3) give them more money with conditions. He has chosen option 3 (with very strict conditions), which is the only reasonable option under the circumstances.

Which brings me to my second point, which I raised yesterday. Implicit in this "analysis" is the idea that it is somehow crazy or unprecedented for government officials to be weighing in on the business decisions of a major company. The reality, though, is that's always what happens when companies become insolvent. In the more typical situation, an insolvent company that believes it can survive if restructured, files for bankruptcy under Chapter 11. By filing for bankruptcy, the company receives protection from its creditors while it attempts to restructure itself. This process is overseen by the court and all important decisions must be approved by the court. Thus bankruptcy judges ultimately determine whether the company must be liquidated or can be restructured. And in the case of restructuring, the plan of reorganization must ultimately be approved by the judge. Sometimes the court actually replaces the management of the company or appoints a trustee.

So it's hard to see what "line" is being crossed here. Whether a plan of reorganization meets with the approval of an expert task force or a bankruptcy judge, either way the government plays a major role. If the White House were interfering in the governance of a solvent entity, that would be completely different, but that's not what's happening. When companies fail, the government steps in and plays a major role. Always. This case is different in procedure only, not principle.

And it makes sense that it is. GM is not just any company. It's a major American institution and its failure has broad ramifications for the economy as a whole. So the task of managing GM's insolvency requires special attention, special procedures, special care. What the Obama administration is pretty clearly doing right now is trying to broker a pre-packaged bankruptcy. In order to manage expectations and control the chaos of a GM bankruptcy, they are giving the company working capital and pushing it to come up with a realistic plan of reorganization, just as a bankruptcy court would do. Because of the current state of the economy, a typical bankruptcy would likely result in liquidation. GM would not be able to get the loans it needs to stay in operation, and without some warranty guarantees, consumers would be unlikely to buy from GM during the bankruptcy process. So the only way this works is if the government provides the loans and backs the warranties and the actual bankruptcy is as quick and stream-lined as possible. That's what they're doing. I expect there will be a formal bankruptcy of some sort down the road, but the groundwork needs to be laid now to make sure that bankruptcy works and that a restructured GM can eventually emerge.

There are legitimate criticisms that can be leveled against the administration for the way it is handling this, but the spectre of "government intrusion" is not one of them. When companies fail, the government always intrudes. They're expected to intrude. That's how it has always worked.