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September 12, 2012 / needhamgrassroots

Why The Chrysler and GM Bailouts Happened

Many critics of the bailout don’t appear to recognize why the issue arose in the first place.

Randal O’Toole, who does transportation policy for Cato, for example has a piece where he says the companies should have just gone through the regular bankruptcy process. In his telling the only reason not to do that was to allocate the losses in a different way. Bondholders took a bigger haircut than they would have in a normal bailout, and the Auto Workers’ Union took a somewhat smaller haircut than it would have in a normal bailout. So there’s Obama trampling ont he rule of law for the sake of his union buddies.

What this story misses is the actual reason for the bailouts, to wit the financial crisis of 2008.

You probably remember that one? Bear Stears got a quasi-bailout, Lehman Brothers went bankrupt, small banks were entering FDIC conservatorship (i.e., going bust) left and right, big banks needed a huge capital infusion from the federal government to stay solvent, and generally everyone was freaking out. Now in order to organize the kind of bankruptcy reorganization that O’Toole is talking about, you need to arrange some financing. The point of the bankruptcy process is to renegotiate contracts and debts such that your enterprise is solvent. But that means that by definition your enterprise isn’t solvent. Someone has to lend it money to tide you over while doing the rearranging. And these are big companies, so it would need to be a lot of money.

That kind of debtor-in-possession financing is impossible to organize during a financial crisis, which is why the companies’ executives came to the government in the first place.

read full article at salon

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