reich asks, why not bankruptcy instead of bailout?

As I understand it, Berkley professor and Clinton administration Secretary of Labor Robert Reich is on the short list of people being considered for Secretary of the Treasury under Obama. With his blog post today, I think he won my support… Here’s a clip.

…When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it – called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers’ heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn’t pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street’s major banks and insurance giant AIG are so important to the national and global economy that they can’t be allowed to fail, that doesn’t mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they’re taking now that taxpayers are bailing them out. But they’re the ones who took the risk. We didn’t.

The Treasury seems to have lost sight of its real client. It’s client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people….

There’s more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers’ creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.

In exchange for government aid, the Big Three’s creditors, shareholders, and executives should be required to accept losses as large as they’d endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions…

Speaking of the $700 billion Wall Street bailout, according to today’s Washington Post, only $290 billion has been allocated thus far. It seems to me to be totally reasonable to suggest that we shut off the spigot right now, before another dollar goes out, and look at this again in the light of day.

And here, because I didn’t know how else to fit it in this post, is a clip from the same Washington Post article about the nonexistent oversight of this bailout program:

…”It’s a mess,” said Eric M. Thorson, the Treasury Department’s inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled. “I don’t think anyone understands right now how we’re going to do proper oversight of this thing”…

We should be demanding people’s heads over the way this was sold to us and administered. People should be begging for their lives instead of cashing bonus checks.

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  1. Brackache
    Posted November 13, 2008 at 11:38 pm | Permalink


  2. Paw
    Posted November 14, 2008 at 2:51 pm | Permalink

    Just so I’m straight on this — They rushed the package under threat of martial law. It didn’t require that the recipients of the $700 billion actually use the money to make loans. They didn’t put anyone in charge of oversight. And the companies ended up using a lot of the money on bonuses and acquiring other companies. Does that about sum it up?

  3. Brackache
    Posted November 14, 2008 at 2:56 pm | Permalink

    Add long winded rhetoric to the contrary, and a bunch of pork to buy up some previous no votes and that’s pretty much it, yeah.

  4. Jim
    Posted November 15, 2008 at 9:30 am | Permalink

    This article
    makes the best argument I’ve read why Chapter 11 is not an option for the automakers.

    It doesn’t make sense to oppose extending $25 billion in loans to the Big Three on the grounds that they are mismanaged and deserve to fail, while at the same time supporting the $700 billion bailout for financial institutions, even though their screw-ups have created a worldwide financial crisis.

  5. Brackache
    Posted November 15, 2008 at 10:32 am | Permalink

    I’m glad I oppose both then. My oldest friend (I met him a couple weeks ago), is probably going to lose his job if GM goes under, but he knows as well as I do that a bailout is a horrible idea and would just postpone the inevitable (if that). He went to Princeton and taught econ at the graduate level, in case anyone’s interested.

  6. kjc
    Posted November 17, 2008 at 2:32 pm | Permalink

    “He went to Princeton and taught econ at the graduate level, in case anyone’s interested.”

    Haha. He must be real smart then!

  7. Brackache
    Posted November 17, 2008 at 4:04 pm | Permalink

    Indeed, kjc, talented and personable too. But he’s a horndog and he farts a LOT.

  8. Rosie
    Posted November 18, 2008 at 11:54 pm | Permalink

    My completely pointless comment is just this: I met Robert Reich when I was 9 years old. We were about the same size. Great big intellect, itty bitty man.

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