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Thread: WSJ: Bankruptcy Is the Perfect Remedy for Detroit

  1. #1
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    WSJ: Bankruptcy Is the Perfect Remedy for Detroit

    [url]http://online.wsj.com/article/SB122939117718809261.html[/url]

    Bankruptcy Is the Perfect Remedy for Detroit
    Washington hates the idea because it would lose leverage.

    By TODD J. ZYWICKI

    While Washington tries to arrange a bailout, the Detroit Three auto makers and their union, the United Auto Workers, keep insisting that bankruptcy would be the kiss of death. Not so: a Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.

    To understand why, consider that the fundamental question to ask of any firm facing bankruptcy is whether it is "economically failed" or simply "financially failed."

    If a typewriter manufacturer were to file for bankruptcy today it likely would be considered an economically failed enterprise. The market for typewriters is small and shrinking, and the manufacturer's financial, physical and human capital would probably be better redeployed elsewhere, such as making computers.

    A financially failed enterprise, on the other hand, is worth more alive than dead. Chapter 11 exists to allow it to continue in business while reorganizing. Reorganization arose in the late 19th century when creditors of railroads unable to meet their debt obligations threatened to tear up their tracks, melt them down, and sell the steel as scrap. But innovative judges, lawyers and businessmen recognized that creditors would collect more if they all agreed to reduce their claims and keep the railroads running and producing revenues to pay them off. The same logic animates Chapter 11 today.

    General Motors looks like a financially failed rather than an economically failed enterprise -- in need of reorganization not liquidation. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well. Bankruptcy provides an opportunity to do all that. Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.

    So why do the Detroit Three managements and the UAW insist that "bankruptcy is not an option"? Perhaps because of the pain that would be inflicted upon both.

    The bankruptcy code places severe limitations on the compensation that can be paid to a manager unless there is a "bona fide job offer from another business at the same or greater rate of compensation." Given the dismal performance of the Detroit Three in recent years, it seems unlikely that their senior management will be highly coveted on the open market. Incumbent management is also likely to find its prospects for continued employment less-secure.

    Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules. The process for adjusting a collective bargaining agreement is somewhat complicated and begins with a sort of compulsory mediation process. But if this fails a company can (with court permission) nullify the agreement. This doomsday scenario is rarely triggered, however, as its threat casts a large shadow over negotiations, providing a stick to force concessions.

    Those Washington politicians who repeat the mantra that "bankruptcy is not an option" probably do so because they want to use free taxpayer money to bribe Detroit into manufacturing the green cars favored by Nancy Pelosi and Harry Reid, rather than those cars American consumers want to buy. A Chapter 11 filing would remove these politicians' leverage, thus explaining their desperation to avoid a bankruptcy.

    In short, Detroit and the public has little to fear from a bankruptcy filing, but much to fear from the corrupt bargain that is emerging among incumbent management, the UAW and Capitol Hill to spend our money to avoid their reality check.

    Mr. Zywicki is a professor of law at George Mason University School of Law.

  2. #2
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    [QUOTE=Vilma;2914487] It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships....It may need new management as well. Bankruptcy provides an opportunity to do all that.[/QUOTE]

    In conclusion, cut wages, cut benefits, cut dealerships.


    And maybe...maybe get new management. Because, you know, failed companies are rarely the fault of the people running them.

    :D:P

  3. #3
    [QUOTE=PlumberKhan;2914522][B]In conclusion, cut wages, cut benefits, cut dealerships AND LIMIT MANAGEMENT COMPENSATION (guess you forgot to add in that)[/B]


    And maybe...maybe get new management. Because, you know, failed companies are rarely the fault of the people running them.

    :D:P[/QUOTE]

    Dude the companies weren't making money, they deserve to file chapter 11.... throw your own money into the company if you want, they still have stocks.... but leave my money alone... you almost sound like your entitled to it.

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    [QUOTE=jefethegreat;2914786]Dude the companies weren't making money, they deserve to file chapter 11.... throw your own money into the company if you want, they still have stocks.... but leave my money alone... you almost sound like your entitled to it.[/QUOTE]

    Oh...and "limit management compensation" is just a fancy way of saying "your bonus will be 20% smaller than last year".

    Besides, bro, I think the Big 3 should go down in flames. I just beg to differ when everyone wants to blame the floor workers for all the company's ailments. The people on top should grow a pair and start accepting responsibility for their own f*ck ups. But it's a constant pattern in this country for executives, upper management, senators and presidents to never ever ever ever shoulder any blame whatsoever for anything that has ever conceivable gone wrong. The buck stops at whoever they are deciding to sh*t on at the moment.

    Well, f*ck y'all. If you want the big bucks, you gotta have the testicles to deal with the big f*ck ups. If not, the nancy boys should go back to sucking on their momma's teats.

  5. #5
    [QUOTE=PlumberKhan;2914816]Oh...and "limit management compensation" is just a fancy way of saying "your bonus will be 20% smaller than last year".

    Besides, bro, I think the Big 3 should go down in flames. [B]I just beg to differ when everyone wants to blame the floor workers for all the company's ailments. The people on top should grow a pair and start accepting responsibility for their own f*ck ups. But it's a constant pattern in this country for executives, upper management, senators and presidents to never ever ever ever shoulder any blame whatsoever for anything that has ever conceivable gone wrong.[/B] The buck stops at whoever they are deciding to sh*t on at the moment.

    Well, f*ck y'all. If you want the big bucks, you gotta have the testicles to deal with the big f*ck ups. If not, the nancy boys should go back to sucking on their momma's teats.[/QUOTE]

    I completely agree on the bold section... but you know while the executives do abuse their power when they hold their position, it is much harder to do so in a competitive and free marketplace. If one CEO gets greedy and wastes his profits on God knows what, as least it's just his company who fails, but when you start regulating these companies it just makes things worse. They send lobbyists to Washington and manipulate their industry to add more entry barriers. These companies artificially gain larger profits and become more corrupt and inefficient. My point is that the reason these companies became so corrupted and inefficient are the very regulation the government put on their the industry. We need to deregulate the markets and dissolve Washington's power. Unlike Washington the free market is efficient, in perfectly competitive industry all profits hover around zero, while no industry is perfectly competitive the closer to perfect competition the better. With small profits the high-ups have less money to waste and lobby with.

    This is the direction we should move in. A free market system like the one that made this country great the first 130 years of its existence. Adding more regulation to the management of corporations is not going to help anything. The management will manipulate and break the new laws (just as they have the old laws) to stay in power and gain huge sums of money. We need more competition, thats the only way to solve this problem.

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    [QUOTE=jefethegreat;2914944]I completely agree on the bold section... but you know while the executives do abuse their power when they hold their position, it is much harder to do so in a competitive and free marketplace. If one CEO gets greedy and wastes his profits on God knows what, as least it's just his company who fails, but when you start regulating these companies it just makes things worse. They send lobbyists to Washington and manipulate their industry to add more entry barriers. These companies artificially gain larger profits and become more corrupt and inefficient. My point is that the reason these companies became so corrupted and inefficient are the very regulation the government put on their the industry. We need to deregulate the markets and dissolve Washington's power. Unlike Washington the free market is efficient, in perfectly competitive industry all profits hover around zero, while no industry is perfectly competitive the closer to perfect competition the better. With small profits the high-ups have less money to waste and lobby with.

    This is the direction we should move in. A free market system like the one that made this country great the first 130 years of its existence. Adding more regulation to the management of corporations is not going to help anything. The management will manipulate and break the new laws (just as they have the old laws) to stay in power and gain huge sums of money. We need more competition, thats the only way to solve this problem.[/QUOTE]

    yes, because heaven forbid if we actually regulated business and made level playing fields, ones that enforced ethical business practices.

    Funny, we all like football here. Yet, football is regulated. How would a football game work if it didn't? I think when you guys here regulated, you think government bureaucracy....it doesn't have to be that way. Business needs referees, and I think we are starting to see more and more (if we are willing to honestly assess the global financial crisis) that it is needed.

  7. #7
    [QUOTE=CanadaSteve;2915083][B]1. yes, because heaven forbid if we actually regulated business and made level playing fields, ones that enforced ethical business practices.
    [/B]
    [B]2. Funny, we all like football here. Yet, football is regulated. How would a football game work if it didn't?[/B] I think when you guys here regulated, you think government bureaucracy....it doesn't have to be that way. Business needs referees, and I think we are starting to see more and more (if we are willing to honestly assess the global financial crisis) that it is needed.[/QUOTE]

    1. If men were angels I would agree with you.

    2. Comparing a sport with the government is utterly ridiculous... but I guess that's how the socialists movement rose... utterly ridiculous reasoning.

  8. #8
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    [QUOTE=jefethegreat;2914944]If one CEO gets greedy and wastes his profits on God knows what, as least it's just his company who fails...[/QUOTE]

    And then everyone whose livelihoods depend on their jobs get shafted because of one man's greed.

    Which is exactly why unions and regulations exist. Unions aren't out there just to f*ck people out of their money...they are there to protect the worker from unmitigated greed because guess what? Left unchecked, greed will always gain the upper hand. Trust me, it's hard to strike a balance...but that is the brilliance of democracy, we can CHANGE it if we want to.

  9. #9
    [QUOTE=PlumberKhan;2915579]And then everyone whose livelihoods depend on their jobs get shafted because of one man's greed.

    [B]Which is exactly why unions and regulations exist. [/B] Unions aren't out there just to f*ck people out of their money...they are there to protect the worker from unmitigated greed because guess what? Left unchecked, greed will always gain the upper hand. Trust me, it's hard to strike a balance...but that is the brilliance of democracy, we can CHANGE it if we want to.[/QUOTE]

    I have nothing against the freedom of working men to assemble and form unions... but the government shouldn't get involved in backing up these unions as they do now. I'm sorry but just because you work someplace does not mean you get to run the show... but go ahead call me cold hearted and out of touch with the working class, I'm just in favor of abolishing the federal reserve and income tax... two of Washington's grossest injustices to the working man.

  10. #10
    Yes the Mgmt is to blame but the union is to blame to, what are they willing to give back? I say let the car companies go under and let them reorganize under 1 or 2 companies. Mgmt salaries cut in half and union benefits the same!

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