Bailouts are Unfair to Those Who are not Bailed Out

If you run a large corporation in trouble, there is a drill that you must follow.

  • In measured tones, tell the public that liquidity is no issue, and that you are more than capable of meeting all obligations.
  • Scream loud behind closed doors to Congress/regulators, saying that you have been a prudent manager, but the economic environment is beyond belief.  You need help and you need it now, and the change in administration might be too late for you.
  • Explain how many other jobs would be lost if you disappeared.  (A canard, because the company won’t disappear.  The equity might be canceled, and some factories closed and jobs lost, but most of the jobs and factories will continue with the bondholders as the new owners.)
  • In the crisis atmosphere, judgment will be suspended (as it was before the Iraq war and at the debates over the bailout), and legislators will vote for something that won’t work, but must be done out of the appearance that Congress must be doing something to fix matters.  Anything to justify their existence…
  • Receive the bailout, and thank them for their wise decision on behalf of the American people.
  • When the bailout monies fail ask for more.  (Think of AIG; you might even get really soft terms.)
  • Because Congress has bought into the original premise of bailing you out, they will do it again to protect their investment.  Regret has set in, and Congress will easily “double down” to throw good money after bad protect their investment.  Remember, Congressmen are facile at speaking to the ignorant populace, but aside from Ron Paul, few have any significant understanding of economics.  As my best boss once said, “I wouldn’t trust him to run a hot dog stand.”

As a CEO with a company in trouble, the objective is to get your foot in the bailout door.  Once inside, it will be difficult for the government to turn its back on you.

And, that is why Congress should refuse to bail out firms, even those that are too big to fail, unless they are taken through bankruptcy first.  Congress invariably throws good money after bad, and we as a nation are the poorer for them doing it.  I have no doubt that the automakers will get bailed out, but it is the wrong decision.  Better they should go through the bankruptcy process so that they can reconcile their cost structures, than that the US government should subsidize unionized auto workers.