GM, Chrysler, Citi, BofA, AIG--each faced three and only three clear choices; bankruptcy Chapter 7 (liquidation of assets--meaning shutting the company), bankruptcy Chapter 11 (reorganization--a laborious legal process in which all constituencies lose something on the prospect that the company can survive), or Government rescue. Most in the public and apparently many in government don't understand the difference between 7 and 11, believing that a company going into bankruptcy is kaput! As a result there was very little governmental will to have allowed an 11 bankruptcy. Instead, the third option, Government rescue, was applied without any regard--it seems--for the meaningful and useful provisions inherent in an 11 bankruptcy. Last week I explained why BK Lite would have been a breakthrough for the government/auto industry;this week the same for the government/financial industry.
BK Lite is simply this; Congress enacts a provision that, if a company accepts funds in lieu of an otherwise assured bankruptcy filing, all contractual commitments of that company are now null, just as they would be in a full fledged bankruptcy procedure. The company then has the right and the obligation to come back with a plan that amends all these obligations, by their judgment--what it takes to be competitive, and hopefully fairly, and then a board of experts selected by the government agrees or amends the plan.
Too simple? probably. Likely to get meaningful results? likely. Better than the alternatives? by a country mile. Let's take AIG. How in the world would Congress, the Secretary of the Treasury, or the President have specific knowledge, or judgment, about bonuses within AIG; their rationale, timing, appropriateness, etc.? This whole fiasco was created because, on this arcane subject, there were too many completely-unknowledgeable fingers in the pie. How in the world would Congress, the Secretary of the Treasury, or the President have specific knowledge, or judgment, about payments (the $13billion at 100%) to Goldman Sachs? This much more serious fiasco was created because there were too many............ Someone needs to be in charge. If BK Lite were in place, when AIG was granted bailout funds, then by definition all such contracts were null and therefore negotiable. The CEO of AIG couldn't hide behind "we have to honor contracts", the Congress and the Secretary of the Treasury wouldn't be involved. If the AIG CEO decided to (a) honor the stay bonuses and/or (b) pay Goldman Sachs off at 100%, then it's his decision based on his judgment, not on the supposed necessity of honoring contracts. The buck stops there.
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