I just posted an article by Robert Weissman on the Jackson Progressive, The Nasty Class and Anti-Union Bias of Auto Bailout Opposition, or the Wall Street-Detroit Double Standard.

Joseph Stieglitz has a contrary view in FT.com.

Stieglitz raises two very important issues:

1. Is it wise to keep the big three afloat so they can keep doing the things that got them into this impasse? Clearly, the upper management of these corporations has given idiots a bad name. Whenever there was a decision to be made about the direction they were going, they invariably made the worst possible choice. With this kind of management, a bridge loan would be more like a bridge to nowhere.

2. Do we want to save the companies and restore them to profitability, or do we want do merely bail out the stockholders and creditors? Normally, when a company fails, the stockholders lose their investment and the creditors receive a pro-rated share of a company’s assets. In a Chapter 11 bankruptcy, the stockholders also lose everything, but the company remains in business and the creditors are forced to take a loss on their debt for the sake of being repaid the rest of it.

Stieglitz believes that a carefully-structured Chapter 11 bankruptcy is the only way to revive the auto industry because it is the only way that the structural defects can be eliminated:

The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.

One thing is certain: nothing will improve until top management is replaced. Any plan that leaves them in control is doomed to failure.

Tags: Stieglitz