Pelosi: bankruptcy is not an option

An announcement could be made by Wednesday:

The Bush administration was considering using money from the $700-billion Troubled Asset Relief Program, designed to help the financial services sector, to provide the emergency loans to automakers. House Speaker Nancy Pelosi (D-San Francisco) told reporters Monday that she was optimistic action would come "sooner rather than later."

"All the signals coming from the White House are that they know that bankruptcy is not an option, and that TARP funds are the only recourse" after a $14-billion auto bailout bill failed in the Senate last week, Pelosi said.

Todd Zywicki debunks this mantra and offers a reasonable explanation why some in Congress are refusing to consider bankruptcy as a solution to the (self-inflicted) mess the automakers are in.  Bankruptcy Is the Perfect Remedy for Detroit:

While Washington tries to arrange a bailout, the Detroit Three auto makers and their union, the United Auto Workers, keep insisting that bankruptcy would be the kiss of death. Not so: a Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.

To understand why, consider that the fundamental question to ask of any firm facing bankruptcy is whether it is "economically failed" or simply "financially failed."

...

General Motors looks like a financially failed rather than an economically failed enterprise -- in need of reorganization not liquidation. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well. Bankruptcy provides an opportunity to do all that. Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.

So why do the Detroit Three managements and the UAW insist that "bankruptcy is not an option"? Perhaps because of the pain that would be inflicted upon both.

The UAW doesn't want to take the strong medicine that would be required under bankruptcy.  Its leaders know that Congress is not inclined to force major concessions on the union or to scrutinize it too closely.  Management has more to fear from Congressional oversight but it would still be considerably more pleasant than facing a bankruptcy judge:

Those Washington politicians who repeat the mantra that "bankruptcy is not an option" probably do so because they want to use free taxpayer money to bribe Detroit into manufacturing the green cars favored by Nancy Pelosi and Harry Reid, rather than those cars American consumers want to buy. A Chapter 11 filing would remove these politicians' leverage, thus explaining their desperation to avoid a bankruptcy.

In short, Detroit and the public has little to fear from a bankruptcy filing, but much to fear from the corrupt bargain that is emerging among incumbent management, the UAW and Capitol Hill to spend our money to avoid their reality check.

Management might be in for a few surprises, however.  Congressional Democrats are notorious for mandating burdensome regulations on employers. As Zywicki points out, by handing over "free taxpayer money" they will dramatically increase their leverage.  To the detriment of us all.

This bailout will give more power to self-interested politicians in Washington.  The hammer will be aimed at management, UAW will operate pretty much as ususal, and the Big Three will continue losing market-share to those dastardly foreign automakers in the South.

And this is just the beginning.  In the not so distant future we'll be hearing how we must give the Big Three another loan, and another.  "Taxpayers have too much money invested to let the automakers fail" will be the story line.  A nationalized automobile industry will be the result.  It's starting now.