Zywicki in WSJ: Chapter 11 Perfect Remedy for Detroit

Detroit has little to fear from a bankruptcy filing, says Professor Todd Zywicki, and everything to gain. Despite efforts by Washington, the Big Three automakers, and the United Auto Workers to convince the public that bankruptcy would signal disaster, a Chapter 11 filing would do far more good than harm, according to Zywicki.

In making his argument in a Wall Street Journal op-ed, Zywicki postulates that there is an essential difference between a business that has failed for economic reasons, such as obsolescence of its product, and one that fails due to financial missteps. In the latter case, which can be applied to the auto industry, Chapter 11 offers an opportunity to reorganize and reap the benefits of restructured operations that might once again lead to financial success.

Bankruptcy Is the Perfect Remedy for Detroit, The Wall Street Journal, December 16, 2008. By Todd J. Zywicki.

"So why do the Detroit Three managements and the UAW insist that 'bankruptcy is not an option'? Perhaps because of the pain that would be inflicted upon both.

"The bankruptcy code places severe limitations on the compensation that can be paid to a manager unless there is a 'bona fide job offer from another business at the same or greater rate of compensation.' Given the dismal performance of the Detroit Three in recent years, it seems unlikely that their senior management will be highly coveted on the open market. Incumbent management is also likely to find its prospects for continued employment less-secure.

"Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules. The process for adjusting a collective bargaining agreement is somewhat complicated and begins with a sort of compulsory mediation process. But if this fails a company can (with court permission) nullify the agreement. This doomsday scenario is rarely triggered, however, as its threat casts a large shadow over negotiations, providing a stick to force concessions.

"Those Washington politicians who repeat the mantra that 'bankruptcy is not an option' probably do so because they want to use free taxpayer money to bribe Detroit into manufacturing the green cars favored by Nancy Pelosi and Harry Reid, rather than those cars American consumers want to buy. A Chapter 11 filing would remove these politicians' leverage, thus explaining their desperation."

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