The Real Difference Between Bankruptcy and Bailout

The Real Difference Between Bankruptcy and Bailout

http://robertreich.blogspot.com/2008/11/real-difference-between-bankruptcy-and.html

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.

The Treasury seems to have lost sight of its real client. Its client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.


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Comments?

that's the difference.

been trying to determine is how many robberies have been going on in the day of light, and nothing is done to stop them? Our federal reserve in New York opened it's doors to the largest withdraw right after or before the Iraq invastion? Unfortunately there was no paper trail.... This was discussed several years ago on D.U. If anyone knows the whereabouts of that info. Post it. We need to keep a running tally of all these mechanisms that have been playing out to the tune of a very vast sum of money owed to the tax payer.

it would appear to be that they are trying to save the American consumers' job(s). We're going to see a pretty bad recession as it is, but sending the Big Boys into Chapter 11, or worse, would cause an immediate and dramatic collapse of confidence and therefore, the economy as a whole. Are your jobs insulated from this?

did you read the entire post? Companies have filed for bankruptcy in the past, re-organized and gone on to flourish another day without getting handouts in taxpayer dollars. The confidence in the system is already gone. Anyone trying to say otherwise is living in denial. The bailout money would be better spent going to rebuild our infrastructure and promoting new industries focused on alternative energy rather than rewarding the old system of failure that cannot be propped up no atter how much money we throw at it. The US wasted lots of money and time trying these types of things during the depression, trying to prop up wheat and home prices and they were all an utter failure. The point of the post is that bankruptcy proceedings are the proper route for getting these companies reorganized and up and running once again without robbing the taxpayer further.
Read the post if you can. I think it makes better sense than throwing good money after bad.

What Robert is glossing over is that Chapter 11 is not a magic band-aid. Creditors do take a hit during bankruptcy and there is always the risk that the company can't emerge from Chapter 11 in which case the creditors take an even bigger hit. He makes the point that the taxpayers are the real clients, but in another he seems to throw them to the winds if they made the mistake of doing business with the company in trouble. What we are trying to avoid here is not so much saving the huge companies that are "too big to fail", but softening the blows on the jobs and the economy that the failure might cause. You may not have felt it yet, but this is going to be a big one. We are trying to make it slow and painful with the bailouts as opposed to shockingly painful. If you think the confidence in the system is gone, then you don't have any concept of how bad it might be. We are trying to keep things functioning while all this bottoms out. There is time later to reflect on how we might go forward differently, but right now we are looking at crisis.

There are a lot of interesting ideas being floated, but the truth is that no one really knows what might happen if we just let them die, so the best plan seems to go forward slowly.

It's all about jobs. We are in a mess because of the subprime mortgage defaults right now. They are a relatively small portion of the mortgage business. If folks lose jobs there's gonna be a whole new round of mortgage defaults and its gonna be ugly.

I'm sorta surprised Robert wrote this, actually. He's usually a lot more humane.

and we are going to have to take a bite.

Crisis of confidence? Yes, indeed.

Are you ever gonna trust a Moody's AAA rating again?

Going to put a lot more in that 401K?

Going to buy a GM Volt in '10?