BUSINESS COLUMN | Wolf: Choosing bankruptcy over bailout

For many Americans, the idea of another round of bailout money for the auto industry is the last straw. Enough!

After all, if Sweden — the socialist land of 55 percent tax rates — could slam the car door in Saab’s face when it requested bailout money, maybe the U.S. should realize the socialist tag it has recently been earning itself is not quite so funny anymore.

Thankfully, the Obama administration is pushing Chapter 11 bankruptcy as the solution for big auto, either because it recognizes it as the right thing to do or because it is worried about the media whooping it would receive from CNBC’s Gasparino and crew if it asked Congress for another mega-billion dollar lottery payout at the expense of the American taxpayer.

Either way the U.S. government is minding its own business for the first time in a long time and letting the private sector take the heat for the fires it started. Chapter 11 bankruptcy, while certainly not pleasant, will allow these companies to continue operations with protection from creditors while regulators and the court system figure out the best solution for the industry to continue going forward.

Hopefully General Motors, Chrysler and other struggling American carmakers come out “stronger, better, leaner” as Sen. John McCain and other lawmakers have advocated. If not, as the story goes, at least it won’t be on our dime.

Simply put, bankruptcy is a far better option than another bailout. A few billion more in Geithner bucks will go straight to creditors and banks — a crew more vicious than a back-alley bookie after the Knicks fail to cover the spread when the phrase “counter-party risk” starts getting thrown around — and will do little to improve the failing competitive position of these firms.

But all those advocating bankruptcy should realize a Chapter 11 restructuring would have plenty of nasty of side effects. Shareholders would be wiped and creditors would be forced to forgive at least a portion of their outstanding debt. Thousands of jobs would be cut in the midst of an emergent employment crisis, while employees fortunate enough to keep their jobs would receive lower wages and fewer benefits for more hours and increased responsibility.

The effects would ripple throughout the broader economy as well. Suppliers, many of whom rely on one or two of the big automakers for the majority of their sales, would be crippled or made bankrupt themselves. The Pension Benefit Guaranty Corporation, the federal corporation created in 1974 to insure pension benefits, would become saddled with massive new liabilities, potentially requiring funding from Congress to stay afloat.

These consequences would be yet another blow to the American economy and would come even without the okay of the House and Senate.

Regardless of how everything turns out, however, the worst of the problem is the lack of consumer confidence and general interest in American cars. According to Yahoo! Autos, the Buick Lacrosse and Ford Focus are the only two American cars ranked in the top ten most popular sedans; in the SUV space, only three American vehicles crack the top ten.

Bailouts are not the way to go. But the evidence supports the fact that even if the balance sheets get cleaned up, it is not clear consumers are interested in staying domestic for their automobiles, or for that matter, that they are interested in buying new cars at all right now.

Only time, and the American consumer, will tell.

Alex Wolf is a junior in Berkeley College.

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