WASHINGTON What's so bad about bankruptcy as an alternative to big bailouts for automakers or other critical U.S. companies? Frozen credit and the hardships of a Chapter 11 reorganization make it a tough pill to swallow for struggling industries and their workers.
More and more lawmakers are promoting Chapter 11 as a condition for a government helping hand. After all, it has worked before to turn debt-saddled firms in the steel, airline and retail industries into leaner and meaner successes.
For now, the talk has centered on Detroit's beleaguered automakers. Company executives have spent the last two days pleading their case in Congress for at least a $25 billion federal bridge loan to pull them out of a death spiral. To a man, the Big Three executives rejected the idea of filing for bankruptcy even as some lawmakers began to warm to the concept.
“I'm very much attracted to the prepackaged bankruptcy idea,” said Sen. Christopher Dodd, D-Conn., who held hearings Tuesday on a bailout as chairman of the Senate banking committee. He was referring to a method of seeking Chapter 11 protection whereby a company would negotiate plans with creditors before filing for bankruptcy, thus speeding up the process.
“I believe their best option would be some type of Chapter 11 bankruptcy, where they can renegotiate – get rid of the management,” the banking committee's ranking Republican, Richard Shelby of Alabama, said Wednesday.
Simply put, a Chapter 11 bankruptcy lets a company stay alive by paying creditors off over time, retaining control of its assets and reorganizing. In the process, they raise capital, downsize and renegotiate contracts to stay alive.
It's what United Airlines did in 2002. The company filed for Chapter 11, reduced the size of its fleet, cut 26,000 jobs and reduced wages for the rest of its work force. In 2006, it successfully emerged from bankruptcy protection.
But the financial crisis has changed the bankruptcy terrain. With the credit markets seizing up, companies would not find easy access to financing. That's why, even as some lawmakers insist that General Motors file for bankruptcy, they acknowledge that federal aid should be part of the package. Bankruptcy lawyer Mark Bane recommends that government assistance would serve best during the prepackaging process, leveraging the company's negotiations by setting an expiration deadline on the aid.
Still, bankruptcy is tough medicine. While creditors, suppliers, and management take a hit, so do a Chapter 11 company's workers. Besides cutting jobs and cutting pay and benefits, United Airlines eliminated its pension plans.
Labor unions wince at the idea. Testifying before Congress last year, AFL-CIO Treasurer Richard Trumka decried a bankruptcy system that he said “has become effectively a device for the wholesale transfer of wealth from workers to other creditors.”
When Dodd asked United Auto Workers president Ron Gettelfinger this week whether prepackaged bankruptcy backed up with federal guarantees was any more palatable, Gettelfinger cited risks to pensions and to retirees who could lose health benefits and are not yet eligible for Medicare.