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Sessions Warns Senate about Auto Bailout
Friday, December 12, 2008
Mr. SESSIONS. I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. SESSIONS. Mr. President, earlier in the week I pointed out that I believe the best way for the big three automakers to reorganize, come out lean and aggressive and competitive, was through the reorganization procedures in chapter 11 of the U.S. Bankruptcy Code. So many companies have taken advantage of it over the years. It is the regular order, as we say in the Senate. It is what happens when companies are not able to meet all of their debt obligations and payments. When this happens they seek protection under chapter 11.
The bankruptcy court has a desire that those companies be successful; that they continue to operate; that people are not laid off; and that the business is not liquidated as it would be if it had filed under chapter 7 of bankruptcy code. In chapter 11, every effort is made to help the company to survive; to eliminate the burdens and legacy costs or other problems they have that are pulling them down, making them noncompetitive.
This week, on December 9, 2008, the Heritage Foundation published a document called ``Bankruptcy Is Best: Responding to Automakers' Arguments Against Chapter 11 Restructuring.'' Mr. Andrew Grossman, a senior legal policy analyst at the Heritage Foundation, writes:
Though a bailout-- That is the Federal Government just giving money to the corporations-- may be better for the automakers' current executives and shareholders, restructuring in bankruptcy remains the best choice for the automakers' continued viability and future success.
In other words, a bankruptcy restructuring and reorganization will be in the best interest for American workers, employees and people who want to buy American automobiles.
We have two cars in my home in Mobile, both of them are pushing 100,000 miles, and both of them are American big three automobiles. I am very happy with them. A lot of people want these automobiles. But the best way to keep the company going, experts say, is through this established legal procedure of bankruptcy, not some special bailout. We have heard this argument: Bankruptcy would lead to failure and millions of jobs lost. The Heritage Foundation responds: ``Bankruptcy protection actually prevents failure.''
Mr. Grossman notes that when a person files bankruptcy, ``it does not mean that the business and its assets will `fail'--that is, cease operations. Many companies, including the bulk of the airline industry following 9/11, have entered bankruptcy, reorganized under its protection, and then emerged as stronger, sustainable businesses.''
That is so true and it is so important to say. Grossman and the Heritage Foundation went on to note:
Once a company has filed for bankruptcy, it receives an automatic stay and may suspend payment of all debts, giving it breathing room to take stock of its assets and situation.
Once you file bankruptcy, everybody knows about bankruptcy. I am not an expert, but I have been involved with it off and on. I helped write the 2005 bankruptcy reform bill. But in bankruptcy, every lawsuit, every claim against your money is stayed. You don't have to pay them off. The judge takes over and makes sure that payments are done in a way that is fair to everyone concerned.
The next argument: Automobile makers are too complex for bankruptcy. The Heritage Foundation report says:
Fact: The bankruptcy process is designed to confront and resolve complex problems and has successfully done so many times in the past.
By chance, one of Alabama's best bankruptcy lawyers was in my office just yesterday. I have known him and respected him. He is totally independent of the circumstance.
I asked him: What do you think?
He said: Chapter 11 is perfect for these companies. It is exactly what is needed. It is set up to handle these kind of circumstances. People keep confusing reorganization under chapter 11, like Delta Airlines went through, with liquidation under chapter 7 bankruptcy where there is no hope of saving the company. They are saying: If you go into bankruptcy, it means the company is doomed. That is not so.
As to the complexity of the matter, the Heritage Foundation report says: ``It is a universal feature of bankruptcy law that creditors and other stakeholders''--that is, creditors, people who are claiming money from GM, Ford, or Chrysler--that they can ``be forced to accept concessions that are necessary to maximize the common pool. Thus some debtors may see their claims transformed into equities stakes''--that is, stock in the company--``so that a business, free of debt, can operate profitably and sustainably. Others may receive pennies on the dollar. Collective bargaining agreements may, as described further below, be modified to put costs in line with industry norms, and other contracts may be rejected. In contrast, a bailout''--that is what we are talking about, giving the automakers money--``fails entirely to address the complexity of the automakers' problems. Unlike the finely honed tools of bankruptcy reorganization, a bailout fails to provide any mechanism (other than money) to restructure debt, repudiate contracts, or renegotiate labor agreements. In short, bankruptcy is a solution to the complexity.''
The report goes on to say:
And these features are most valuable in large and complex cases that would be impossible otherwise.
The Heritage report goes on to note that chapter 11 organizations have included energy and finance giant Conseco; Delta Airlines; the parent corporation of United Airlines; telecom giant WorldCom, now MCI; Texaco; Adelphia Communications; and Global Crossing. All those have been in bankruptcy and have come out reorganized.
The report continues:
Despite this enormous complexity, all of these businesses were able to reorganize under the protection of the bankruptcy process and emerge as viable, competitive businesses.
And these companies did all of this without, let me add, a penny of Government money being put into them.
What about the argument that you could not renegotiate labor agreements in bankruptcy? The Heritage Foundation and Mr. Grossman found this:
Chapter 11 provides a straightforward mechanism, unavailable outside of bankruptcy, to modify collective bargaining agreements to adapt to economic realities.
The report sets forth some of the additional protections that labor has and additional proofs that have to be made to modify a labor contract, but the evidence is taken, and labor contracts can be modified to help make the business viable. But do not miss the fact that the law provides workers a very fair chance to defend their legitimate interests.
The report concludes on this question:
Thus, the bankruptcy judge has significant discretion and power to push the parties toward an agreement that is mutually acceptable, conforms to economic realities, and ensures that the business is able to return to profitability.
They go on and note about the bailout, however:
A bailout, in contrast, would likely provide no new legal authority to achieve this result.
Now, there is an argument being made that restructuring in bankruptcy would not work because sufficient debtor-in-possession financing is not available for an automaker in the current economic climate. Let me explain how debtor-in-possession financing works. If a company were to file for chapter 11 protection, then a judge takes control, has hearings and listens to testimony, keep in mind there is a stay in place that holds off the debtors making claims for money, that judge then may find that for the company to survive, it may need to borrow more money. The court can induce a private lender to loan the corporation money, that is, financing a debtor who remains in possession. That lender then gets a priority over every other claim to the company because it is the money that keeps the company surviving.
I would say that were this scenario to play out, as I just described, I would be quite willing to consider legitimate assistance from the Federal Government in a way that would provide maximum protection to the taxpayer and would also provide a maximum opportunity for the company to be successful. That is the way the law provides for. That is the way every corporation I know of that gets in trouble has to be handled. I do not see the advantage of providing one special industry billions and billions of dollars bailout when we know this $14 billion is just the first installment. One economist has predicted it would be $75 billion to $125 billion before we are through. So this minimal, legitimate government assistance as a provider of debtor-in-possession financing would be a better way to do it.
Proponents of chapter 11 for automobile companies include Luigi Zingales of the University of Chicago and Edward Altman of New York University's Stern School of Business. They explain how this government supported debtor-in-possession mechanism operates. They note that:
This option would be superior to a nonbankruptcy bailout because it would provide greater protection (bankruptcy's ``super-priority'')--
To the person who puts in the money at the end to make the company viable-- to taxpayers, would do more to force the automakers to reform their operations while providing them greater flexibility to do so, and would be more likely to succeed.
I know some ideas have been floated recently; that our distinguished colleague, Senator Corker from Tennessee, has proposed that we may well be able to accomplish most of these things without going into bankruptcy. We are studying that. But his proposal has the hammer that if agreements are reached to modify and protect the companies from claimants, then they would be required to go into bankruptcy.
One of the problems of Congress trying to fix the problem and the automakers not going into bankruptcy is a constitutional problem. Bankruptcy courts modify in part and sometimes invalidate in part, and entirely, portions of contracts. That is a great power and the Constitution provides for this use of bankruptcy.
I am not sure we in Congress can pass a law that could invalidate contracts. I have argued we should go in that direction always, I hope my colleagues understand, under the belief that this is the regular order; this is the proper legal way for a company to reorganize itself and survive if it is in financial difficulties.
We need to quit giving special privileges where they are not needed. Such behavior ought to be kept to the most narrow, special benefits outside of the traditional free market principles that have made this country great. If we have to go around them or violate them or bend a bit because of the size and the number of people who might be involved, well, let's do so within our heritage as much as possible, within the rule of law as much as possible. I think that is the best way to do it.
So I wished to share my thoughts with my colleagues. I would urge them, if they are interested in the details, to look into the Web site of the Heritage Foundation to examine what this bankruptcy report study shows and why, according to their report: ``Bankruptcy Is Best.'' I believe it is.
I thank the Chair and also express my appreciation for what I understand to be some progress toward reaching a proposal we could vote on in this body that would be much better than the one that has originally been put forward by the Democratic leader and the White House. I do not think the President or the Democratic leader has it right. I think a lot of other Members of this body do not feel like they have it right. What we need to do is to do what we can to assist these companies through a very difficult period of time, to give them an opportunity to eliminate some of the excessive burden they have been carrying so that when they enter into the race to the competitive marketplace, they will be leaner and more efficient and more capable of being successful, more able to be competitive, and can restore their vigor and vitality.
We have to do that, and they have to get out from under some of these burdens. I personally think the best way to do that is through bankruptcy. It may be that some of the work Senator Corker and others have worked on can get us there in a slightly different way. I am open to that thought and certainly am desirous of a conclusion that could gain bipartisan support.
I thank the Chair and yield the floor.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER (Mr. Sanders). The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. REID. Mr. President, I ask unanimous consent the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
