The Big 3 automakers are back. You will recall that Congress sent them packing last month telling them to try again in December after they had put together a new business plan. In a press conference this morning, Nancy Pelosi said of the carmakers, "We want to see a commitment to the future. We want to see a restructuring of their approach, that they have a new business model, a new business plan." She continued, "It is my hope that we would pass legislation to help the industry." To hear Pelosi talk, it sounds like Congress has become the "venture capitalist of last resort."
I have a real problem with Congress acting as venture capitalist. Given the economic disaster we are currently working through--much of which can be traced to bad ideas and lousy policy from both parties--why should we have any confidence that Congress knows a decent business plan when they see it? Detroit doesn't need a bailout. Detroit needs bankruptcy.
Chapter 11 of the U.S. bankruptcy code was meant to provide breathing room for companies needing to restructure their businesses. In Chapter 11, a company continues to operate, but debtors are shielded from the demands of creditors while they work through the thorny issues that called the company's viability into question in the first place. This is exactly what the U.S. car companies need. They have too much debt, are captive to too many costly labor contracts, are hamstrung by inefficient work rules, and are stuck in too many poorly designed contracts, including severance agreements with inept senior managers. A Chapter 11 bankruptcy would allow these companies to systematically work through these problems under the auspices of bankruptcy court.
And this is where Congress really is needed. It has an important role to play in facilitating, not preventing, this process. When a company declares Chapter 11 bankruptcy, it continues to operate, making and selling products. Because its operations continue, it needs ongoing access to working capital. However, in Chapter 11, the traditional sources of working capital dry up as investors become concerned about the borrower's credit worthiness. Often companies in Chapter 11 turn to "Debtor in Possession" or DIP financing for their working capital. Unfortunately DIP financing is scarce right now.
Congress can help make DIP financing available to the Big 3. It can facilitate private lenders by providing loan guarantees or it could potentially make DIP funds available directly. Of course, the Big 3 and Big Labor have studiously avoided discussing this path of action. They try to paint the issue as a choice between bailing out and shutting down. In this they are disingenuous. There is a third way. Chapter 11 is what Detroit really needs.