EDITORIAL: The case for Chapter 11

By | Thursday, December 4, 2008

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The Big Three automakers (Ford, Chrysler and General Motors) return to Washington this week with their hands out - begging for federal assistance and warning that the economy will collapse if American taxpayers don't pony up with another federal "loan." It's a terrible idea. Instead of throwing more good taxpayer money after bad, it's time to let the marketplace work its will and let the Big Three reorganize themselves under Chapter 11 of the federal Bankruptcy Code.

In September, Congress passed and President Bush signed into law $25 billion in loans to the Big Three, and this week the automakers (who are losing about $6 billion a month) will push for at least another $25 billion in loans. But it is difficult to see how putting more taxpayer dollars into a failed business model makes sense. The decline of GM, Ford and Chrysler has been more than three decades in the making. U.S. automakers crippled their own ability to compete by signing absurdly generous contracts with the United Auto Workers union. Last year, the average hourly labor cost of wages and benefits paid by the Big Three was $73. By comparison, the average for Japanese manufacturers in the United States was $48. Health benefits add $1,300 to the cost of every car made by the Big Three.

Chapter 11 bankruptcy would enable the Big Three to reorganize themselves into new companies without the union contracts that are crippling their ability to stay competitive. Chapter 11 would not mean the end of Ford, General Motors or Chrysler. Quite the contrary: It would give these companies breathing space to make the changes necessary to remain viable. The bankruptcy process would give the parties - dealers, customers, retirees and unions - the opportunity to negotiate the terms of a compromise that would allow streamlined companies to emerge with wage structures that give them an opportunity to survive in the global marketplace.

Currently, the UAW and the Big Three are trying to scare the American people by conjuring up all kinds of horrific scenarios in the event of Chapter 11. One of their least persuasive arguments is the assertion that if any of these companies went into bankruptcy, consumers would not be able to obtain parts for their automobiles or have their warranties honored. In fact, what would happen is this: The bankruptcy court would transfer the intellectual property rights of GM, Ford or Chrysler to other firms that sought to manufacture their auto parts. The bankruptcy court's job would be to make sure that consumers' interests are protected.

John Berlau of the Competitive Enterprise Institute (CEI) points to the example of the DeLorean Motor Co., which filed for bankruptcy protection in 1982. The DeLorean bankruptcy actually was a liquidation, not a reorganization under Chapter 11. While no new DeLoreans have been made since that time, there are an estimated 6,500 on the road today that need spare parts. So, what do consumers do when the firm that makes the cars is no longer in business? They purchase original and reproduction parts from the new DeLorean Motor Comp. - a firm under completely different ownership that acquired the rights to the old company's designs. Also, an Indiana firm sells parts for Studebaker automobiles - cars last made in the 1960s.

Warranties would be a more complicated matter, but in all likelihood, the bankruptcy court would make them a priority among debts to be repaid. Chapter 11 reorganization would be a far better alternative than letting the three automakers sink or bailing them out. Forcing taxpayers to pour more money into the failed business models of the Big Three will not work, because it is doubtful that these companies can reposition themselves to pay the loans.

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