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The Longer The Better

According to news reports, Bush administration officials are thinking long and hard about the circumstances of an auto bailout and the best way to get the Big Three to make needed reforms. This is an entirely positive development. It suggests that the White House is not about to be buffaloed into a deal or do this without careful study of the car companies’ financial status. The Wall Street Journal reports:

The Bush administration must also figure out whether, and how, to try to wring concessions from affected parties, including factory workers, dealers and holders of the companies’ debt. Without such concessions, the companies are likely to need cash infusions long into the future, congressional critics say.

The Bush administration can try to demand concessions upfront as a condition for making initial rescue loans. But it is unlikely Treasury can extract concessions from all the affected parties as part of a loan deal.

A more effective way to gain those concessions likely would be for the government to put together some sort of prearranged bankruptcy agreement for one or more of the companies. Going to bankruptcy court would give the companies, and the government, more leverage, because creditors’ legal and contractual rights are generally subject to being rewritten in bankruptcy.

“The one thing that concerns us is a disorderly bankruptcy,” a senior administration official said Sunday. “Every other option is open.”

If we have come full circle to a pre-packaged bankruptcy option then we indeed have made progress in getting serious about the crippling obligations — debt and labor — which must be addressed as a condition of a bailout. At first blush it seems counter-intuitive that the UAW would accept a pre-packaged bankruptcy (in which its labor deals potentially can be entirely re-written) rather than make specific concessions up front. But in the former case it is the “judge’s fault,” while in the latter the union officials must take the heat for “making concessions.”

The bottom line: the means by which we get to the end is far less important than the goal — getting the Big Three (maybe the Big Two, if Chrysler doesn’t make it) to make reforms, so that taxpayers’ money may help them recover. And frankly, the solution must be just disagreeable enough that the rest of American industry doesn’t line up at the door for their share of the pie.



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