Chapter 11? Not the End of the Road!

When talk surfaced earlier this fall that the federal government was considering putting a huge bail out package together to aid several failing companies, I immediately began to question the wisdom of this approach. After all, if private enterprise fails what role does government have in propping up a business?

Early on, I contacted one of my US Senators, Elizabeth Dole, and told her office that I was opposed to the bail out plan that was originally under consideration. Unlike our other US Senator, Richard Burr, Senator Dole later voted against the revised bail out plan which had widespread bipartisan support. Some $700 billion later, we don’t know where all of the money has gone or in what way that it has been used. We have heard stories about lavish taxpayer funded junkets for executives which took place after the bail out money was dispensed (thank you, AIG).

Today, a lot more companies have lined up with their hands out including American Express, General Motors, Chrysler, and Ford. I’ve also heard that about half of the bail out monies — $350 billion – may not be dispensed by Treasury Secretary Henry M. Paulson, Jr., as the Bush Administration prefers that the remaining funds be used per the Obama Administration’s discretion come January 20, 2009 when The One ascends to the presidency of the United States of America.

So, my question is this: if it was a matter of life and death back in September that $700 billion be given immediately to prop up failing companies, why is it that the remaining funds can be sat on for at least two more months before the next administration decides what to do with it? I can only conclude that there wasn’t an emergency in the first place.

I’ll tell you what this is all about: fear. Yes, a group of politicians tried to scare us into forking over a wad of our money a few months ago and it is that same tactic the US automakers are now using (plus select other companies). My response to their demand for taxpayer money: file for Chapter 11 bankruptcy if things are as bad as you assert. After all, you are a private enterprise – why should America be forced to fund your poorly managed companies?

Chapter 11 of the US Bankruptcy Code allows businesses to reorganize their operations while remaining open for business. On the other hand, Chapter 7 is essentially a fire sale bankruptcy, one where the assets are liquidated and the business is shut down.

Now I must tell you that the automakers are suggesting that if they file for bankruptcy, millions of jobs will be lost. Really? Are they planning to file bankruptcy under Chapter 7, not Chapter 11? If so, why?

My thinking is that the automakers are taking a page from the fear play book, painting a worst case scenario where none exists. If the automakers file for Chapter 11 bankruptcy, that’ll open up a world of possibilities for them: union contracts can be negotiated, dealership relationships terminated, contracts with suppliers reviewed, and much more. True, GM and others would escape some of their financial responsibilities but it is these same poorly negotiated contracts which has all three automakers in their current bind.

Why wouldn’t the automakers choose Chapter 11? Political pressure. Politicians whose voting base is heavily unionized want the bail out. They know that some employees will be laid off, plants closed, and tax revenue lost. Meanwhile, a bail out doesn’t cut to the heart of the issue: all three automakers desperately need to be restructured. Inject some taxpayer money into all three companies today and I guarantee it that they’ll hold their hands out again in the near future.

To my fellow Americans: fear can be a great motivator, but it can also be used to act irrationally and protect your self interests even at the expense of other people. Government solutions to any problem –whether real or trumped up – means centralized control and the gradual erosion of our freedoms and the death of free enterprise.

I don’t like how any of this is playing out and I think that most Americans, if they had all of the right information before them, would agree and let their elected officials know that propping up the free enterprise system is bad for taxpayers and businesses alike.

Financial Collapse? It Was Bound To Happen!

We’re getting almost constant feedback in the news these days regarding the current collapse of several large financial institutions.

Bank of America purchased Merrill Lynch over the weekend, deciding that “the bull” was a better deal than Lehman Brothers, which was also on the market. Lehman, without a new suitor coming forth, ended up filing for bankruptcy protection on Monday.

AIG Tumbles And Slips

The American International Group, or AIG, is also on the ropes looking for a way out as it tries to find $75 billion in funding to stop its own bleeding. When the stock market opened on Tuesday, AIG promptly saw the price of its shares drop by 75%, but recovered most of its losses later in the day when rumors of a government bail out surfaced.

Finally, but certainly not the last of it all, Washington Mutual saw its bond rating drop to junk status on Monday, but also saw its share prices increase by 20%.

You may be asking, “what is going on here?” And, I must tell you that I haven’t fully grasped the seismic shift in the financial markets but I do understand that much of this is payback for those institutions who invested heavily in real estate and other lending opportunities early in the decade when money was cheap. Now, finding themselves over exposed when interest rates increased and consumers defaulted on their loans, these same companies are fighting for their lives.

Fannie And Freddie Take It On The Chin

Along with Fannie Mae and Freddie Mac, lenders who back the bulk of the US real estate market, the reverberations are being felt through the investment world as stock markets from New York to London, and all across Europe and Asia are witnessing steep declines with central banks in many countries pouring billions of dollars into the financial markets to stem the slide.

Maximizing The Political Side Of The News

Politicians are quick to grab the leading news story of the day and have been making sport of it all week. Senator McCain is promising an investigation into Wall Street, a move echoed by Representative Pelosi. Senator Obama is using the news to attack McCain, citing that the economic practices of President Bush are to be blamed for the crisis. Obama is trying to tie McCain to every Bush practice and policy, hoping that voters will think that a McCain presidency will be akin to Bush serving a third term.

Clearly, making political hay out of any newsworthy situation is par for the course, but it isn’t as easy as that. Low interest rates, as part of Federal Reserve Bank policy, encouraged lenders to relax their lending standards, welcoming hundreds of thousands of consumers into the housing market who probably never should have been there. No documentation mortgages was one of the stupidest ideas, allowing many people to purchase a home without proof of income.

Perhaps the biggest problem with the current crisis is that there is very little oversight of the financial industry. The federal government has agencies and people in place who are to hold financial institutions accountable, but no one is warning the American people of the problems that lay ahead. Instead of politicians blaming each other, why not tell us — people with a vested interest in these companies — what is really going on to help us make an informed decision about what we need to do?

Sorry, I guess I’m trying to make simplistic sense out of this crisis, but it seems to me that there should be much more accountability without the federal government controlling companies and putting that burden on the taxpayer to bail out shareholders and prop up executives who stand to walk away with millions of dollars in their pockets.

Photo Credit: Steve Woods