Shields: Bankruptcy a viable option

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(HOST) Commentator Geoff Shields is President and Dean of Vermont Law School. And he thinks that the best way to address the crisis in the auto industry would be to use a legal process that is already tested and ready.

(SHIELDS) We are all now aware that the United States is immersed in an economic and financial crisis – perhaps the worst since the great depression of the 1930s.

It’s important in dealing with a crisis like this that we pick the method of government action carefully.  While there were significant missteps in the bank bailout, that seems to be getting on track.   

There are also many positive elements to the stimulus package. However, I have deep concerns about what is now front and center – dealing with the auto company crisis.  Unlike the banking sector, where lending capacity is the issue, there is no shortage of capacity in the automobile industry in the United States.  What we are really focused on in the "auto crisis" is a question of whether the United States will pour endless funds into two of many auto companies producing cars in the U.S.: General Motors and Chrysler.

The President has announced that he, along with his economic czar, Lawrence Summers, and the Secretary of the Treasury Timothy Geithner, are going to personally make the decision of whether and how much money to provide to GM and Chrysler.  While Geithner and Summers are experts in the banking industry, they are not experts in the automobile industry or on labor issues – which stand at the heart of the automobile crisis.

Worse, by having the President and his top advisors make these decisions, the issue moves from one of hard-headed business and legal analysis to politics.  Michigan is a crucial swing state.  Both GM and Chrysler are headquartered in Michigan and the bulk of the workers for the companies are located in Michigan.

And we should not forget that if there is a political deal worked out to bail out GM and Chrysler, there will be many other industries that will follow, each asking for taxpayer support.  

I recommend an alternative.

That process is bankruptcy.  We have seen from the airline industry that it is possible to keep a company going without missing a beat while going through bankruptcy – United Airlines is only one of many examples.  The Bankruptcy judge and the parties themselves can deal effectively with restructuring labor union contracts and "cramming down" the amount due to stock and bond holders.  In bankruptcy reorganization, the current management can stay in place or new management can be brought in.  Through the bankruptcy process, those who pay for the reorganization are substantially the stock and bond holders of the company – not the taxpayers.

And finally, don’t we really want our President to be focusing not on the details of re-negotiation of automobile labor union contracts, but rather on the broader issues facing the country and the economy?

We need to consider the impartial process of bankruptcy as the best path for restructuring GM and Chrysler.

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