Lawmakers this evening gave up on talks for an auto bailout, with union concessions (or lack thereof) being the major disagreement. There are numerous problems in the original House bill. By subordinating other creditors to the government's claim, the government has a Constitutional issue with the takings clause. The car czar will be subjected to more political pressure than the governor of Illinois. And it is unreasonable that current equity holders won't be totally wiped out - with 20% warrants, existing equity holders will retain more than half of the equity.
For all of its faults, the bill would ensure that the automakers avoid a Chapter 7 liquidation, a disaster scenario that would wreck havoc on the American economy. Senate Republicans have sensible objections that should be resolved. But that is not an excuse for doing nothing. Both sides need to swallow their objections and find a compromise bill that can pass both chambers. Passing a flawed bill is better than passing no bill at all.
Thursday, December 11, 2008
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3 comments:
I think you mean "wreak havoc" not wreck. Wrecking havoc doesn't make sense.
How about no evil?
Why is passing any bill required? Chapter 7 is not where they are headed, it's Chapter 11. This would allow for an orderly restructuring of their flawed business model.
Corey, as the auto companies are out of cash, if they entered Chapter 11 they would need an immediate loan. These are typically available to companies in Chapter 11 (they are called debtor-in-possession, or DIP loans), but the confluence of the credit crisis and the ugly position of the automakers means that no lender is likely to want to provide DIP financing. I am in complete agreement that a Chapter 11 restructuring would help them, but without the DIP loan, they would end up in Chapter 7. Hence my suggestion in an earlier article for the government to provide the DIP loan with some additional features, and then use the normal bankruptcy process.
Texan in Grad School, you are obviously right.
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