(The following opinion article, published by The Wall Street Journal Dec. 15, was written by Todd Zywicki, a law professor at George Mason University in Fairfax, Va. The article is provided so union members can better understand and be aware of the attacks that are made on their collectively bargained contracts by opinion leaders on the far right.)
While Washington tries to arrange a bailout, the three auto makers and their union, the United Auto Workers, keep insisting that bankruptcy would be the kiss of death. Not so: a Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.
To understand why, consider that the fundamental question to ask of any firm facing bankruptcy is whether it is "economically failed" or simply "financially failed."
If a typewriter manufacturer were to file for bankruptcy today, it likely would be considered an economically failed enterprise. The market for typewriters is small and shrinking, and the manufacturer's financial, physical and human capital would probably be better redeployed elsewhere, such as making computers.
A financially failed enterprise, on the other hand, is worth more alive than dead. Chapter 11 exists to allow it to continue in business while reorganizing.
Reorganization arose in the late 19th century when creditors of railroads, unable to meet their debt obligations, threatened to tear up their tracks, melt them down, and sell the steel as scrap.
But innovative judges, lawyers and businessmen recognized that creditors would collect more if they all agreed to reduce their claims and keep the railroads running and producing revenues to pay them off. The same logic animates Chapter 11 today.
General Motors looks like a financially failed rather than an economically failed enterprise -- in need of reorganization not liquidation. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships.
This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well.
Bankruptcy provides an opportunity to do all that.
Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.
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 to avoid a bankruptcy.
In short, Detroit and the public has little to fear from a bankruptcy filing, but much to fear from the corrupt bargain that is emerging among incumbent management, the UAW and Capitol Hill to spend our money to avoid their reality check.
