When faced with disaster, the natural response of people — and businesses — is to fight for time and hope for the best. The likely outcome of this strategy would be a succession of failures that would spare no one. We believe that there is a better way: simultaneous bankruptcy filing by all three companies would substantially reduce both the uncertainty and the stigma for each one.

SYNC, AND SWIM TOGETHER [11.25.08]
By Daniel Kahneman and Andrew M. Rosenfield

DANIEL KAHNEMAN, an emeritus professor of psychology at Princeton, received the Nobel in economics in 2002. ANDREW M. ROSENFIELD is a senior lecturer at the University of Chicago Law School and the chairman of an investment advisory firm.

Daniel Kahneman's Edge Bio Page

Andrew M. Rosenfield's Edge Bio Page


SYNC, AND SWIM TOGETHER

The chief executive of General Motors recently said bankruptcy is not an option and that even talking about it hurts business. He is probably right.

Bankruptcy has worked well for troubled companies in many industries — by providing a way for them to adjust their contractual arrangements with investors, employees, suppliers, distributors, dealers and others. But it is not well suited to automakers because cars are durable goods that buyers hold and use for many years. Indeed, 8 in 10 consumers say they would not buy or lease a car from a manufacturer that files for bankruptcy.

Auto companies considering bankruptcy protection face two related problems: uncertainty and stigma. Potential car buyers become uncertain about the reliability of warranties and the long-term availability of service and parts. And there is little pleasure in driving around in the product of a failed company.

Any one of the three major American carmakers — Chrysler, Ford and G.M. — could probably file for Chapter 11 today, because the present value of its liabilities most likely exceeds the present value of its assets. (That is really the only basis for a business to seek a bailout from the government.) However, the flight of customers would be so severe that the financing that the company would need to thrive in reorganization would probably not be available, especially at a time of so much turmoil in the credit markets.

Does this mean doom for the Big Three? Clearly the market thinks so. In the absence of swift and significant governmental action, the companies appear to be headed for failure. The combined equity valuations of Chrysler, Ford and G.M. total less than $6 billion, which is not even a fifth the valuation of Honda and only about a twentieth that of Toyota.

When faced with disaster, the natural response of people — and businesses — is to fight for time and hope for the best. The likely outcome of this strategy would be a succession of failures that would spare no one. We believe that there is a better way: simultaneous bankruptcy filing by all three companies would substantially reduce both the uncertainty and the stigma for each one.

A coordinated filing would send a message that the problem is systemic — not an indication that American manufacturers produce inferior cars and trucks. It would also signal that a systemic solution to save the industry is in the works.

We do not suggest that this would be a panacea: the American carmakers’ market share would most likely decline, but less so than if the companies were allowed to fail one after the other.

The Big Three are competitors and not all would welcome the idea of coordinated bankruptcy. And even if they wanted to, they could not simply decide to simultaneously file, because any such private agreement could be viewed as a garden-variety violation of antitrust law. Government intervention will be required.

To assure consumers that the American automobile industry will be able to reorganize, the federal government should facilitate a simultaneous bankruptcy filing and also provide the debt financing needed. These actions could help avoid a very costly liquidation with job losses not only among the Big Three but also at companies that provide parts and services to them, and stretching more generally throughout the economy.

Any other form of bailout for Detroit would likely require a long political process, and that would only worsen the economic destruction.


[Editor's Note: First published as an Op-Ed Page article in The New York Times on November 25, 2008]


John Brockman, Editor and Publisher
Russell Weinberger, Associate Publisher

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