General Motors should have filed for Chapter 11 bankruptcy protection last fall, if not earlier. It was obvious in 2008 that GM was deep in the red, burning through cash, struggling to service debt, suffering steep sales declines, facing bleak prospects and failing to find new sources of capital.
In November, GM turned to the federal government for a bailout loan — the one final alternative to bankruptcy. After a lot of discussion and some rich debate, Congress voted against a bailout, seemingly foreclosing all options except bankruptcy. But before GM could avail itself of bankruptcy protection, President Bush took the fateful decision of circumventing Congress and diverting $15.4 billion from Trouble Asset Relief Program funds to GM (in the chummy spirit of avoiding tough news around the holidays).
That was the original sin. George W. Bush is very much complicit in the nationalization of GM and the cascade of similar interventions that may follow. Had Bush not funded GM in December (under questionable authority, no less), the company probably would have filed for bankruptcy on Jan. 1, at which point prospective buyers, both foreign and domestic, would have surfaced and made bids for spin-off assets or equity stakes in the “New GM,” just as is happening now.
Of course, a bankruptcy judge, acting in an apolitical environment, would have had to determine whether GM could emerge from Chapter 11 as a going concern. That determination might have necessitated different concessions from different stakeholders. For example, the United Auto Workers union might have had to accept real pay cuts (not just revamped work rules) and the secured bondholders might not have been strong-armed into taking pennies on their investment dollars. And, certainly, taxpayer resources would not have been tapped. Sure, there would have been plant closures, dealership terminations and jobs losses, just as there are under the current nationalization plan.
But the path we’ve taken, regrettably, goes through an expensive, political minefield. If GM emerges from bankruptcy organized and governed by the plan created by the Obama administration, it is impossible to see how free markets will have anything to do with the U.S. auto industry henceforth. With taxpayers on the hook for $50 billion (at a minimum), the administration will do whatever it has to — including tilting the playing field with policies that induce consumers to buy GM, hamstring GM’s competition or subsidize its costs — for GM to succeed. Thus, $50 billion is a sum that is more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.
Thus, what’s going to happen to Ford? With the government backing GM, will Ford’s access to capital be compromised? Can it compete against an entity backed by an unrestrained national treasury? Or are there more government-sponsored bankruptcies in our future?