We Have Chapter 11 for a Reason

By William McGurn, Wall Street Journal - March 31, 2009

Our Beltway sans-culottes are tasting blood.

First the people's representatives took their tar and torches to American International Group's bonus payments. Now the president has dropped the guillotine on the chairman and CEO of General Motors. The irony, of course, is that far from signaling an end to federal dollars for a failing industry, the high-profile firing of Rick Wagoner paves the way for more aid down the road.

Car makers aren't the only businesses suffering.

In his televised address yesterday morning, Barack Obama was frank about the failures of GM and Chrysler. He spoke refreshingly of bankruptcy as a tool that could help make our troubled auto makers restructure into something stronger and more competitive. And he made clear that he appreciates the distress being felt by our fellow Americans states such as Michigan and Ohio, where whole communities have been ravaged by Detroit's decline.

A well-planned restructuring may help put these Americans on better economic footing. But we would do well to remember that these are not the only families who will be affected by intervention. Lost in the current debate seems to be any reference to other men and women who work just as hard for their money, who have either lost their jobs or face the prospect of losing their jobs, and whose families are also suffering in this recession.

Here are just a few of them:

- Mom and pop shops, and their employees. All along the small-town shopping district in my New Jersey community, "for rent" signs are popping up where someone's dream businesses once stood. The workers in these enterprises paid their taxes like everyone else, and they now face the same struggles that laid-off autoworkers in the Midwest do. And they might ask: Are their counterparts at GM and Chrysler more deserving of a bailout simply because they work for larger companies?

- Americans working in U.S.-based auto plants owned and operated by foreign companies. These auto makers have also been hit by the recession, and some are laying off American workers or putting their American expansion plans on hold. Still, these car companies generally operate from a more competitive cost structure, and they have been gaining market share because they are building cars that more Americans want to buy at prices we are willing to pay. Why should these workers, who generally receive lower wages than their Big Three counterparts, see their tax dollars go to bail out their competitors?

- American shareholders who have invested in these successful auto companies. When investors buy stock in an enterprise, they do so based on their read of the economic environment. Those who have invested in foreign auto makers have done so on the rational basis that these companies have a competitive model that offers them a chance for profit. How fair is it for the government to come in now, tilt the playing field, and diminish the value of their investments by propping up their less successful competitors?

- The American taxpayer. It's one thing for the government to intervene to prevent a panic from spreading. There's even an argument for providing loans to tide companies over until they have worked out their restructuring, or prepared a plan to enter Chapter 11 in a way that will avoid complete liquidation. The president was right to talk about the contribution America's auto giants have made to a thriving middle class. But should we be bailing out GM and Chrysler because they are an important "emblem of the American spirit"?

- Finally, the GM and Chrysler workers themselves. Plainly, whatever company emerges from this turmoil will have fewer employees working for more sensible wages and fewer Cadillac-style benefits. Right now the argument has been that no one will buy cars from a company that files for bankruptcy. But if you had to bet, which offers the best chance for a brighter upside: a company that restructured under Chapter 11 or one restructured with the help of Congress and the White House?

In his new economic blog at, my former White House colleague offers a comprehensive and an easy to understand analysis of the Detroit crisis -- how we got there, how George W. Bush responded, and the options Mr. Obama has before him today. Mr. Hennessey says he was encouraged by Mr. Obama's willingness to say the B-word in public yesterday morning. Even more important, he says, with his statement the president made it easier to make the politically difficult decision to send these companies to bankruptcy court when the next deadline hits.

"The idea that GM could continue to ask for taxpayer dollars without changing its management was never viable," says Mr. Hennessey.

"But if the priority is looking out for American workers and taxpayers, we'll probably find these decisions are better made via the clear and established process of a bankruptcy court rather than leaving them to the political ups and downs of Washington."

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