The Real Difference Between Bankruptcy and Bailout

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it – called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers’ heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn’t pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street’s major banks and insurance giant AIG are so important to the national and global economy that they can’t be allowed to fail, that doesn’t mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they’re taking now that taxpayers are bailing them out. But they’re the ones who took the risk. We didn’t.

The Treasury seems to have lost sight of its real client. It’s client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

It would be different if Main Street was getting something out of all this. But credit still isn’t flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.

There’s more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers’ creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.

In exchange for government aid, the Big Three’s creditors, shareholders, and executives should be required to accept losses as large as they’d endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.

And what a tragedy it would be if the government spends so much on these bailouts there isn’t enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs — including jobs rebuilding the nation’s crumbling infrastructure and finding alternative sources of energy.

It’s not the big guys who need rescuing. It’s the small. Right now, the government has its priorities upside down.

Originally published on November 11, 2008 at Robert Reich’s blog and reproduced here with the author’s permission.

7 Responses to "The Real Difference Between Bankruptcy and Bailout"

  1. Guest   November 12, 2008 at 9:57 am

    Finally some one is talking about the interest of the country at large and not the interest of the banks and wall street.Thanks R. Reich!!!! I pray that Obama and his cabinet will think as clearly as yourself.Ed Carreon

  2. TheEdge   November 12, 2008 at 9:59 am

    Amen! Way too much “special interests” driving policy decisions with public money. The greater good is not the primary interest of the government. We all are going to pay dearly. This is a moral issue, and those who made self-interest decisions with the nations money should be very shameful and remorseful. They fueled a lot of hardship to come.

  3. Andre Bolkonsky   November 12, 2008 at 3:53 pm

    Yes, and you would have to laugh at the McCain’s claim that Obama was going to redistribute income, except that it is so painful to see who are the beneficiaries of one of the largest wealth transfers in human history, the last act of the Bush administration. Bankruptcy is a deliberate process, slow, orderly, under the supervision of a judge, enacted in accordance with legal precedents. A most important difference with the current rush to bail out, and the boats that are being bailed out seem to continue to sink.

  4. ignatius   November 12, 2008 at 6:14 pm

    I fear the whole point of this bailout orgy is precisely to scorch the earth and plunder whatever is left in order to not leave any money behind for the new administration.

  5. Guest   November 13, 2008 at 11:13 am

    There could be a middle group. Granted Chapter 11 is there for this type of process, however we are in unique times. Thus instead of giving industrial companies monies that allows them to adjust their balance sheets, pay bills, etc. the government investment should be placed on the consumer side that pulls production through the system. IE: for every american made car purchased during a period of time, the consumer would receive a $$ amount off in addition to a specified automaker discount. The amount of the government discount for the purchase of new american made vehicle would be reimbursed to the automaker. The automaker could not substitue existing discount for the govt. backed. This would focus consumer investments into key industries that also feed other sectors, promotes back fill production once supplies move and does not require the goverment $$ until the sale occurs. There could be restriction placed on the company (pay, discounts, concessions, etc.)

    • Anonymous   November 14, 2008 at 6:28 pm

      So American’s run out and purchase American made Toyota’s, BMW’s, Mercedes, Honda’s, Subaru’s etc. this would help the big 3 how?

  6. JamesGuest   November 17, 2008 at 8:30 am

    We are taking a very dangerous approach in addressing some of the financial problems and setting a very dangerous presedence in our response to the crisis… Basic business understanding requires willingness to accept the inevitable, facing reality, and adhering to basic financial, and economic principles. We allowed the country to spend more than it earns, created a real estate commodities market, this time around to include residential, enticed the homeowner, and mainstreet America to live beyond their means, spend and spend more is the rhetoric commonly used, and cited as the fuel that drives the economy even when there is no more to spend. Lets not forget the trillions that have been lost in the markets, IRAs, 401K, pension plans, the 10,000 foreclosures going on everyday… And all we hear is how can we get the consumer spending again???