Detroit: Synchronized Bankruptcy the Solution?

Daniel Kahneman of Princeton and Andrew M. Rosenfield of the University of Chicago Law School penned an Op-Ed a few days ago for the New York Times proposing a novel solution for the automaker bankruptcy/bailout crisis.  Their proposal lies somewhere in between bail and bankrupt, I suppose.

“We believe that there is a better way: simultaneous bankruptcy filing by all three companies would substantially reduce both the uncertainty and the stigma for each one.”

It is a short editorial, so should anyone be interested in the proposal, I recommend reading it in it’s entirety.  But the quotation above I believe accurately summarizes their proposal and its primary benefit.

It is shocking to me how the tide of public (as voiced in editorials) opinion has shifted away from a typical bailout and towards a bankruptcy filing.  I certainly understand that the Big Three need more than just a little help to get through a tough time: their business has to change from the blue-collar union members’ compensation levels, to their suddenly ineffectual lobbying team, their either uncompetitive or stifled research and engineering teams (their designs seem fine), and of course, their clueless and politically-disabled management.

In Kahneman and Rosenfield’s proposal, they acknowledge the dearth of debtor-in-possession financing if any one (let alone all three) automakers were to file for chapter 11, and propose that the government step in with the funds to insure continued operations and, I would assume, an orderly liquidation to repay the loan.  If the government is going to step in with a loan where the market would not, why not avoid the stigma of bankruptcy entirely and just provide the loan prior to a bankruptcy filing?

A bankruptcy might allow for more leverage to renegotiate contracts or shirk obligations, but any shortage in pension or medical benefits will fall in the government’s lap anyways, so there’s no benefit if you consider the automakers and the government to be on the same side.

A bailout could include conditions that protect these obligations to an extent as well as force management changes, executive compensation restrictions, and elbow Detroit into building cars that everyone-but-Detroit-executives recognize as being popular in the future.

Considering the changes that need to be made, why not retain government involvement and avoid bankruptcy’s stigma entirely by keeping the government in control of the financing?

Either way, whatever money is lent to the Big Three, whether as a bailout or as debtor-in-possession financing, is gone.  But at least the Big Three might survive in a more substantial and useful form should the government be able to keep the incompetent automotive executives in check.

(for firsthand accounts of GM’s executive and managerial incompetence, please see this insider’s account by Bob Sutton — found a few day’s ago in the daily links at Naked Capitalism — that highlights the top-down structure of GM and its ability to stifle dissenting thought)

… and the cow goes moo