I think that bankruptcy must be a misunderstood concept. In the Joe Soptic commercial (the commercial about how Bain Capital and Romney closed Soptic’s steel plant after siphoning out all of the money leading to the death of Soptic’s wife) bankruptcy and the idea of plant closing are conflated by focusing on the plant being “loaded up with debt” causing the plant to shut down. A permanent plant closing should be based upon whether the plant has value as a going concern, not whether the owner has accumulated debt. In other words, if a plant can produce and sell its products at a profit, there should be a mechanism for capturing this value. This is bankruptcy. Under bankruptcy rules the insolvency of the owner will not end its economic life of the plant but merely transfer ownership. What bankruptcy essentially does is shift ownership of assets, like factories, from an insolvent debtor to the debtor’s creditors or to others who buy the business from the bankruptcy court. This is the very idea of bankruptcy including the oft heard term ‘Chapter 11.’ When the value of a business as an ongoing concern exceeds the value of the same business when sold for its constituent parts, bankruptcy allows an orderly transfer of the underlying business in a way which protects its value for the benefit of the owner’s creditors. What happened with Soptic’s plant was that it was closed because it was no longer economically viable even if it is true that excessive debt was incurred by the company owner’s, including Bain, in the years leading up to the end.
As an example, see what happened to GM after its pre-packaged bankruptcy. GM went through bankruptcy and is now making “record” profits. It is once again number one in the world. But how can this be possible, the old owners of GM stock lost all of their equity, their stock certificates became worthless. Well, creditors like the US government* got 61% of new GM for about $50 Billion advanced. The unions got 17.5% for $20 Billion owed by old GM to their medical care trust fund. The bondholders got 10% for the $27 Billion that they loaned. Other creditors, including the people injured by GM products manufactured by the old GM got a percentage as well but they lost any right to sue the GM which emerged from bankruptcy. This is what bankruptcy is about. There was a small difference, though, between GM and other Chapter 11 bankruptcies. Notwithstanding the GM bankruptcy its union contracts remained intact. Contracts of any type can be broken or modified by the bankruptcy judge if it is in the best interest of the new company. The “loser” with the broken contract becomes a creditor of the old company, as with the $20 Billion owed to the UAW’s health care trust. But in this case, the union contracts were left intact to follow the new GM. And in fact, in 2011, the GM union contracts were even extended by agreement with the management of new GM, including the US government. But, even if the GM bankruptcy was unfair to bondholders and overly generous to the old GM’s unions, the effect of bankruptcy was that the new owners replaced the old owners and the company continued as a going concern. And that’s what I’m talking about.
*Of course, there was a enormous bailout from the US government involved in GM’s bankruptcy. Bailouts are unusual, notwithstanding President Obama’s campaign touting of the GM model, and such bailouts are really unnecessary in most cases. Other buyers were interested in GM but not in its union contracts. If businesses are economically viable after the bankruptcy judge eliminates burdensome contracts and debts, they can continue. In the GM bankruptcy it was the unions which were bailed out (the collective bargaining contracts were hardly touched) but the equity of the stockholders was destroyed. New GM was created to ‘buy’ the business of old GM but with collective bargaining agreements in place to carry on the business. And so it goes.
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