The phenomenon we now know as Chapter 11 bankruptcy was born during the financial panics that regularly pummeled the U.S. economy in the 1800s. Railroads had emerged as the country’s first large industrial corporations, and every time the markets crashed and the economy slumped, many found themselves unable to pay their bills.
These railroads were worth more alive than dead, so inventive people figured out ways to reorganize them rather than shut them down. “The investment banks and lawyers and managers would negotiate a deal and get the courts to bless it,” says David Skeel, a law professor at the University of Pennsylvania and author of Debt’s Dominion: A History of Bankruptcy Law in America. “It was a very flexible reorganization process.” It was also a uniquely American answer to business failure. The private sector took the lead. Reinvention–and rebirth–was the goal.
The reorganization option faded after William O. Douglas (then SEC chairman, later a Supreme Court Justice) persuaded Congress in 1938 to approve more punitive bankruptcy laws, but it was resurrected by Congress in 1978 as Chapter 11 of the bankruptcy code. Since then Chapter 11 has been used to reorganize airlines, steelmakers and countless other companies in trouble.
Now, though, something curious is happening. We’ve been hit by a financial crisis eerily reminiscent of those 19th century panics. But instead of going to bankruptcy court, troubled firms are lining up at the Federal Reserve, the Treasury Department and Congress. Read more.
The column echoes a bunch of things I’ve already written here, and ends up favoring some sort of Washington-arranged workout that looks a bit like Chapter 11 but isn’t. I should point out that Megan McArdle wrote a post a couple of days ago claiming that the people who endorse such an approach share one crucial trait: They’re from outside the Beltway.
All the analysts from left to right basically agree what should happen to GM, if there is a bailout: it needs to get a lot leaner and a lot meaner: slash the number of marques and car lines it makes, concentrating on a profitable core. Smart commentators like Felix Salmon and James Surowiecki view the bailout as a way to give GM enough breathing room to accomplish that transition.
But no one inside the beltway, left to right, thinks that this kind of pseudo-LBO in any way resembles what is actually going to happen. The entire motivation for the bailout … is to keep GM from precipitously shedding jobs. And every marque you shut down, every line you slash, means closed plants and layoffs.
Mind you, I’m talking about the supporters of the bailout. They view the thing as half Hail Mary pass to shore up a profitable sector of the labor movement, half fantasy bid for a green car that none of them has the faintest idea how to build … They emphatically do not view it as an orderly means to let GM shed 2/3 of its union workforce, which is one of the sunnier figures I’ve heard for a profitable firm.
The opponents, meanwhile, are considerably more cynical. They (we) think that even if Congress allows substantial layoffs, they will do so in a way that will cripple the firms; plant/brand closures will be decided based on where the cars are produced, rather than their profit margins.