Bankruptcy for GM

What would it mean to have GM go bankrupt? A change in ownership and a renegotiation of contracts.

The factories, computers, office space, intellectual property and so forth that are now owned by GM would not disappear; they would basically become the property of GM’s creditors. These creditors would sell the assets to the highest bidder. Assuming there is economic value to be created by continuing to operate the company as a business, private equity or strategic investors would buy the assets, shut down some plants, fire some union and exempt workers, and probably use the leverage of bankruptcy court to get a better deal from the unions. The current employees and creditors would be better off if you and I were forced by the federal government to pay money to the corporate entity named General Motors, to then be paid to these employees and creditors. Of course, you and I would be worse off in this situation. On balance, if you believe that markets are more efficient allocators of capital than Congress is, the population of the United States would, on the whole, be worse off.

Is this fair to the people who work at GM and will now have a deal changed after the fact? Well, when people sold parts to GM on credit, or employees (individually or via union negotiations) entered into labor contracts with GM, they undertook counterparty risk. That is, they were taking, in part, a bet about whether GM would actually be able to pay them what they are owed. This is also true for pension payments, which are simply deferred compensation, as much as it is for deferred payments on credit terms for parts. To act now as if they should be protected from this risk is to treat them as children.

Is this fair, given that you and I are being forced to cough up an immense amount of money to bailout bankers in New York who are far less sympathetic characters than assembly line workers or Assistant Market Research Managers in Warren, Michigan? We are bailing out bankers, not because we want to avoid employees losing jobs at AIG or shareholders losing money at Merrill Lynch – in fact, as I have argued form the beginning, it is essential that employees and investors not be protected as part of these bailouts – but because the economy as whole is at risk of devastation if we allow systemic collapse of the banking system. We are bailing out parts of the finance industry because it is good for us, not because it is good for the finance industry. This ultimate public backstop is why it is appropriate and prudent to regulate parts of the finance industry to avoid collapses that threaten the whole economy.

Isn’t it important that we maintain an industrial base as a matter of national security? Yes, but that is not the same thing as saying that the current management of GM needs to continue to have operational control of these assets, or that current employment levels are appropriate, or that current union contracts need to be maintained. There is a potential argument to be made on these grounds for some kinds of restrictions on foreign ownership.

A bailout of GM would be a pure exercise of political power to deliver taxpayer funds to one organized group of citizens at the expense of the country as a whole. It should be avoided.