BANKRUPTCY VS. BAILOUT IN THE AUTO INDUSTRY

Guest Post by Ashley Bertoldo, student at Brigham Young University

The automotive industry crises that emerged at the end of the 2000’s was a result of numerous unforeseen occurrences as well as poor strategic decisions on the part of company executives. Due to the relatively high profit margins on SUV and trucks as opposed to mid-size and compact cars, the executives of several car-manufacturing companies decided to double down on their larger vehicles. Profits were expected to soar as a growing number of factories began producing these larger vehicles. Unfortunately for these companies, the price of oil increased in the mid-2000s, which prompted consumers to opt for smaller vehicles. These companies had already begun to experience financial losses before the downturn of 2008. Due to problems in the financial industry, raw materials for vehicle production increased in price and the number of sales decreased. The auto companies then found that they were in debt, meaning they owed more money than they actually had. The companies were on the verge of collapse.

Policy-makers agreed that the hundreds of thousands of jobs that were on the line were worth saving. Several different ideas emerged regarding what should be done in order to save jobs and allow these companies to continue operating. Mitt Romney stated that the companies should be put through a managed bankruptcy. In a managed bankruptcy, the company would have been able to continue ownership of the majority of its property while eliminating most of its debts in exchange for new ones. The opinion was that private investors would be able to invest in the company and pay off old debts in exchange for a future promise of repayment or small ownership in the company. If necessary, the federal government would have guaranteed the loans to the auto companies. The downside to this approach was that during this time, very few investors and firms were willing to risk any money or give any credit whatsoever. Doubts persist as to whether or not enough money would have been raised. The other alternative was a bailout, in which the US government would have loaned or given money to the automakers and let them continue business as usual. The problem with this approach is the fact that more money would have been lent to a company, which had shown its inability to be profitable, thus prolonging the inevitable decline.

The eventual outcome was a hybrid of the two. The companies were forced to undergo a period of restructuring, in which the company was reorganized and the government lent them money to pay off their immediate debts. The companies emerged more efficient, but it would be at the expense of the federal government until the automakers were able to pay off their new debts, which did eventually happen.Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.