Courting Bankruptcy

Why Obama’s GM-Chrysler plan is making conservatives so happy.

General Motors CEO Richard Wagoner. Click image to expand.
General Motors CEO Richard Wagoner 

President Obama’s plan to restructure General Motors and Chrysler is not designed to make conservatives happy. But cheers from the right may be an unexpected byproduct.

In his speech Monday introducing the plan, Obama finally used the B-word—and it wasn’t bailout. “While Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plans they develop,” he said. “That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger.”

Bankruptcy does not necessarily mean dissolving the company and selling off its parts, Obama explained. That would be Chapter 7 bankruptcy, which nobody is proposing. What Obama was suggesting is Chapter 11 bankruptcy, which just means restructuring debts and contracts. The bankrupt company still exists—it’s just a slimmer version of its former self.

Which is exactly what conservatives have been suggesting all along. In December, many House Republicans urged President Bush to simply let the Big Three enter bankruptcy rather than spend taxpayer money on companies that would probably fail anyway. In November, Mitt Romney wrote a column in the New York Times titled “Let Detroit Go Bankrupt.” At the very least, he argued, to make U.S. companies competitive with foreign carmakers, a government-sponsored plan should include firing management, cutting workers’ pay, and reducing salaries and perks for executives.

The bailout bill passed, of course, with support from both parties. But now, $17 billion later and with the bailed-out companies still foundering, Obama appears to be reconsidering the bankruptcy option. The plan drew jeers from some Republicans, including Sens. Bob Corker, Mitch McConnell, and John McCain. Sen. Harry Reid, meanwhile, commended Obama’s “firm resolve” in dealing with automakers, and Michigan Rep. John Dingell praised the plan. *

More noteworthy were the words of praise from conservative politicians and policy wonks. Republican Rep. Darrell Issa, a ranking member of the House oversight committee, said it “struck the right chord in seeking balance between supporting the American auto industry and calling for a much-needed restructuring of GM and Chrysler.” Bankruptcy “went from being off the table to the lead option,” said James Gattuso of the Heritage Foundation. “So far it’s just talk, but it’s encouraging talk.” Daniel Ikenson of the libertarian Cato Institute said: “The hardball that Obama appears to be playing now is exactly what a bankruptcy judge would do.”

But if that’s true, who needs Chapter 11? Why not just settle everything out of court, like adults? After all, while Obama can push for concessions, he can’t force them (nor would he particularly want to abrogate union contracts). A bankruptcy judge, meanwhile, can impose limits on worker wages or executive compensation. Another advantage of bankruptcy court is that the negotiations are apolitical. If the company can be saved, the court will try to save it. If not, it won’t. At the same time, workers and executives get paid according to court-determined formulas. Campaign donations don’t figure into it. And bankruptcy may still be inevitable. According to an analysis by the administration’s auto task force, GM and Chrysler failed to make the necessary adjustments over the past three months. Why would the next two be any different?

All the same, it’s clear that the Obama administration would rather avoid bankruptcy. For one thing, some economists think letting GM and Chrysler fail would hurt the rest of the auto industry, from parts suppliers to dealerships. Moreover, the administration would rather not be seen as having abandoned two massive car companies. After Obama’s announcement Monday, GM’s stock tumbled 30 percent. The stock market itself took a dive, too. Bankruptcy would make those plunges look tame.

Instead, Obama seems to be keeping his options open. If the companies do go into Chapter 11, he can say he did everything he could to save them. At the same time, the “tough love” message signals to critics that he’s not writing the auto companies a blank check. And the threat of bankruptcy is now hanging over the heads of unions and company officials, just to show them he’s serious.

Republicans no doubt relish the thought of Obama carrying out their original plan. But based on Monday’s reaction, it could also win the president some conservative fans.

Correction, April 2, 2009: This article originally identified Rep. John Dingell as a senator. (Return to the corrected sentence.)