The Case Against (GM's) Bankruptcy
Barry Adler's post suggests that changes in conventional wisdom or laws might be needed to encourage efficient, earlier Chapter 11 bankruptcy petitions. With a few twists and turns the arguments for and against this idea might cause us to reassess or review the fundamentals of bankruptcy. It is plausible that we would be better off moving in the opposite direction, welcoming the death of bankruptcy, at least for large organizations. Perhaps GM (which is to say its creditors, executives, or shareholders) and other enterprises would be better off if forced to work out problems by contract (by which I mean arrangements that leave as little room as possible for surprise in court).
The argument for quicker restructuring/liquidations is that the prospect of creditors' toughness in bankruptcy causes managers to put off the inevitable. One counterargument is that creditors can fend for themselves by contract. But once we take these steps, we may as well say that these rules do not much matter. Whatever the bankruptcy rules, markets will adjust and credit and equity and even supply, warranty, and employment contracts will be priced accordingly. If there is a collective action problem that threatens to destroy the going concern value of a firm, there is room for a bargain that pays off those with prior contractual claims. And if the threat be the opposite one, that managers or other interests will keep the firm alive too long in order to enjoy payments or await a low-probability upside return, then that too can be handled by contracts.
A popular and sophisticated academic reaction to this sort of thinking is the suggestion that the sooner we hold an auction the better. A third party will buy the firm and that price will indirectly determine the shares all prior claimants ought to receive. But it is easy to see why managers and other interests might work (inefficiently) to avoid whatever triggers law sets up to bring on this auction. In contrast, we might just as well deny bankruptcy and force things to be decided by contract (recognizing that one form of contract might be a provision permitting some party or some vote to trigger an auction of the enterprise). I hope this is a fair review.
What does all this (Coasian thinking, which is to say obvious to some and startling or ridiculously unrealistic to others) have to do with GM? If the question were about a state, it would seem more obvious that bankruptcy might best be off the table. We tend to think that in the long run Illinois should make good on its promises or work with creditors, and be disciplined by voters and taxpayers. It has different principal-agent problems from those of GM, but each problem has a counterpart in the other sphere. The state can be awfully creative in bringing in new taxpayers, customers, and creditors, but for the most part all the parties expect the obligations and contracts to be honored. (I realize that the matter is much more complicated than this, but I do not want to turn this into a public choice topic.) Perhaps GM is or should be more like Illinois. We can try to take away some of the stratgeic behavior (or transaction costs that respond to the threat of such behavior) by making the horizon longer rather than shorter. And the fact that GM can be bought, raided, or divided up much more easily than Illinois suggests, if anything, that law try to stay out of the way. Or perhaps the rule just does not matter. Put in terms of the data on firm longevity, the more we react to the danger that managers keep firms alive in order to avoid the toughness of bankruptcy, the more we might simply encourage sales to third parties that benefit managers in other ways. Won't comparable principal-agent problems reassert themselves whatever the legal rules?