Late last year, conservatives advocated pushing GM into a Chapter 11 bankruptcy proceeding. Echoing the conservative line last December, Sen. Jim DeMint (R-SC) told the Fox Business Network:
“We don’t think it is the role of government to intervene…We need to let the market and the laws work the way they are already in place.”
But doing it then, without a pre-packaged agreement amongst creditors, suppliers, workers and management, alongside protections for consumers, could have been disastrous.
As Susan Helper, an economics professor at Case Western Reserve University, told the Huffington Post, “I thought filing for bankruptcy in December would be a disaster…It would have focused people on fighting over who was going to get paid, rather than making the companies work better.”
Merely plunging into bankruptcy proceedings without a prepackaged plan would have left suppliers and manufacturers of intermediate goods (who provide parts and materials for every car company with factories in the Unites States — including Toyota and Honda) struggling to secure credit, forcing cascading layoffs and stalled production that would have caused slowdowns throughout the industry. Combined with customers who would steer clear of Detroit brands because of uncertainty surrounding maintenance warranties, a messy bankruptcy could have have kicked off a vicious downward spiral that could have ended in liquidation and enormous job losses.
A study from the Center for Automotive Research suggests that an unsuccessful bankruptcy of GM and Chrysler would have cost approximately 1.3 million jobs. “Instead,” reports the New Republic, “the likely hit from the twin restructurings is 250,000.”
A GM in bankruptcy last November, in the midst of a nearly frozen credit-market, would have found it nearly impossible to find creditors to finance them through a Chapter 11, so without government assistance, they probably would have had to undergo a rapid and jarring liquidation under Chapter 7. This would have meant mass layoffs, a sell-off of assets at bargain basement prices, dismantling of factories, and hundreds of thousands more Americans straining states’ fraying unemployment safety nets, and a denial of millions of dollars in revenue to starved state budgets.
The current bankruptcy agreement, backed with public dollars, is a big improvement on what could have been put together last December. After the Bush administration kicked the can down the road, the Obama administration has worked as quickly as possible putting together an agreement that pairs an investment of public money with concessions from creditors, management and unions, and predictability for suppliers and guarantees for potential customers. Prepackaged bankruptcies are usually preferred amongst ailing companies as the best way to preserve value for creditors (which, in the case of GM, means taxpayers). As economist Dean Baker explained, “Back in December and January, when none of these pieces were in place, there was still enough up in the air that I think it would have been reckless to have done a bankruptcy.”
It still may not work, but taking the time to put together a careful pre-packaged Chapter 11 filing and averting a slide towards reckless liquidation was most likely worth the time and money. After all, the livelihoods of hundreds of thousands of American families are at stake.