Thursday, November 20, 2008

Fuming Mad! Stupid bail-out. Misled Congress.

I started my day at a different office, which meant I’ve spent a lot more time in the car than on a usual commute to work. I listened to the radio about 2 hours longer this morning than I usually would have. I basically flip between two AM stations to get twice the traffic coverage. One broadcasts Los Angeles traffic on the “ones” while the other broadcasts on the “fives”. Generally, there is not a lot different between the two broadcasts but I’m tend to interrupt the pattern with work phone calls, which means I’m not actually getting two traffic updates every 10 minutes.

Anyway, between phone calls and traffic reports, KFWB has an interview with Senator Barbara Boxer. The main point of the interview is predominantly focused on what she intends to do with legislation about the environment now that we’ll be having stronger congressional and Whitehouse support for policies which conform to her point of view. Close to the end of the interview the topic moves toward the “bail-out” the big three are currently seeking. Although I am not fully on board with the environmental legislation she was touting, this was actually where my blood began to boil. I am furious.

When did the federal government become chief loan officer and financier of big business? Yeah, I know. It didn’t start in the last couple months, though that was the biggest foray into the financial world the government has ever made.

For the sake of our country’s long-term interests, I just wish our lawmakers would look at the constitution just a little. Seriously. I have looked and there is not a “Bailout Clause” in the constitution. There is, however a “Bankruptcy Clause” in the U.S. Constitution (Article I, Section 8, Clause 4).

Here’s the deal, the framers of the U.S. Constitution specifically anticipated the nation would have serious economic troubles occasionally. Since this was anticipated, they included the power to enact bankruptcy laws as part of the Congressional Powers. They did not include the power to enact “bailout” laws. Throughout U.S. history, we’ve encountered various economic “panics”. Every couple of decades something in our economy gets off kilter. These hardships always lead to some kind of evolution in state and federal bankruptcy laws. Bankruptcy allows individuals and corporations to hit a kind of reset button. It works.

At some different points the bankruptcy laws have favored the creditor class. The other times, the bankruptcy laws favored the debtors. Here’s the deal. In most cases the economic hardships were eventually manifested in bankruptcy proceedings.

Just as all rivers flow to the sea, bad debt must find its way to discharge. Bankruptcy court is where judges and attorneys and other financial exerts – actuaries, accountants, etc – deal with each case on the merits. Through this process, some sort of solution is arranged. Some people come out OK, while others lose it all. Capital flows from the weak hands to the strong ones and the economy plugs along.

So, why are we doing everything we can to avoid a process that has worked many times over during our 200+ year history? We’ve “bailed-out” financial institutions, which has propped up poor business practices. The natural strengthening of the overall system that is a result of bankruptcy will never happen with a bail-out. The burden of the poor choices rests squarely on everyone’s shoulders.

This leads us to what got me steamed this morning. The U.S. automobile industry is seeking their share of the TARP money. Dire are the consequences if they don’t get a bail-out of their own! That is what they want everyone to believe. Well, what will happen? They’ll have to file for Chapter 11. So?

When the automakers file for bankruptcy, the automobile factories will still be there. The patents and designs aren’t going to disappear. The workers and design teams will still be ready and willing to work. Everyone still has their part in this.

General Motors, Ford and Chrysler – without the legacy costs of pensions and health care and contracts for non-working union members – would be a decent investment for a Debtor-in-Possession form of financing. You know, the kind of financing available to firms who’ve filed chapter 11. Just about any DIP-lender would certainly jump at the chance to go into the management suites to take names, fight the good fight and eliminate any and all deadwood. Over the long term, if U.S. automakers actually paid more for steel than they have to pay for retiree health care, then we would probably see a revival of that industry.

So, what comes of a bail-out? Imagine all that money that we’ve already given to Mr. Paulson. Out of the 700 billion dollars of TARP funds, most has been given away. Not a penny has been given out with strings attached. We have AIG’s executives running off to a conference on my money (Taxpayers). This is seriously not the right plan.

We need to let these organizations follow the path that will provide for the best future, not the easiest path that doesn’t require change. We need to remind congress. We need to send them a message - Bankruptcy is a good solution that will put us on the right road to overcoming these problems. A bail-out does nothing but cost us money and reinforce bad business.
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