Normal bankruptcies are designed to salvage value for creditors and allow companies to restructure and become more competitive. At a minimum, restructuring means cutting the fat, reducing the work force or at least their wages and benefits, tossing out unprofitable product lines and sometimes a complete overhaul of the company culture.
But what happens to this process when governments bailout a company or become a shareholder? Take the case of General Motors in 2009. The Obama administration bought shares on two conditions: 1) no layoffs, maintain high union wages, pensions and medical-benefits
2) keep making small, low-emission automobiles, even though they were unpopular and therefore unprofitable. Of course the company agreed but there was an elephant in the room that everyone ignored. In the mid 2000's, there was mounting evidence that some small-car models had defective ignition switches that, when jiggled or moved, could cause airbags to fail to deploy. A disproportionate number of accidents were reported but the company did not recall the vehicles. Why? Critics argued that recall was too expensive, especially for cars that were unprofitable.
They pointed out that General Motors had no hesitation in recalling SUV's or trucks because they were profitable and repair expenses did not cut deeply into the bottom line. During this period, regulators did examine the claims but did not have enough evidence to intervene.
Fast forward to the 20009 government buy-out. Now the government-the automotive industry regulators -owned the company. Accidents continued but still no recall.
How much evidence did the regulators/owners need to order a recall? Conflict of interest? You be the judge, but in my view, a government is either owner or regulator - it can't be both.
(A recall was eventually issued and a Congressional Hearing into the long delay is currently in session on Capitol Hill in Washington D.C.)
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