The President's role in restructuring GM

If General Motors is going to receive more financial aid from the federal government, it is apparently going to have to achieve new concessions from creditors, unions and retirees. Former GM CEO Rick Wagoner and other directors have reportedly lost their jobs as a condition for the White House to provide any more funding to the U.S. auto industry giant.

All this raises questions about what the government's role in private industry should be, and how to apply that power across different industries. For example, although the executives at some banks have been replaced and certain FDIC members placed under government control, there are also financial firms which have received bailouts but have not been forced to restructure. Meanwhile, President Obama and Treasury Secretary Geithner have been calling for a plan under which the taxpayers would assume control of the banking industry's toxic assets - a far cry from forcing a restructuring deal.

To begin with, does President Obama or "the government" actually have the authority to force GM into bankruptcy, even if it is a short-lived "prepackaged bankruptcy"? Actually, yes - prepackaged bankruptcies are allowed under Chapter 11 restructuring bankruptcies, and certain creditors can force a company into an involuntary bankruptcy under Section 303 of the bankruptcy code. So because the government is a creditor to GM, and not simply an investor owning common or preferred stock, it would be permissible under certain circumstances for the government to force GM into bankruptcy.

But another question also looms: what is the definition of "the government"? When it is said that "the government" is a GM creditor, does that refer to the President, Congress, or the Treasury? Or is there even a written definition for this particular circumstance? Certainly the government should not be interfering with private industry except as authorized by law, but all these bailouts and questions as to which firms are "too big to fail" has left us in a situation not seen in over 70 years, so there is little experimental evidence to go on as to how we should proceed. And since there are economic and social differences between modern times and the Great Depression, from the loss of the manufacturing industry to the social safety net programs such as unemployment benefits, what would have been effective int the 1930s will not necessarily work now.

When any company, from a bank to GM to AIG, requests government assistance, that firm should expect to have changes imposed on it. After all, if the company had been healthy and prosperous to begin with, there would have been no need for any bailout. Furthermore, the possibility of government intervention following a bailout would hopefully provide incentive for companies to NOT seek government assistance, but rather would convince both the company and its creditors that a mutually acceptable restructuring with no government interference would be in their best interests.

Alas, there have already been billions of dollars spent in assisting U.S. firms, with the possibility of much more on the way. So while we should strive to minimize or eliminate all government funding to private businesses, there should also be a system in place in case such action is deemed necessary by both the public and private sectors in order to minimize abuses to the system. For example, when the government becomes a creditor to a private company, perhaps there should be a clause in the bankruptcy code in which only a joint congressional resolution would place that company into involuntary bankruptcy, or perhaps that power should reside with the President or the Treasury Secretary. Point is, there is no such legal provision, so while the President's actions may be with the best intent and for the protection of the taxpayers, the fact that there is currently no legal framework for what is happening could very well be setting a dangerous precedent. Of course, any mere legal framework in and of itself cannot prevent abuses from either private industry or the government, nor could such framework even guarantee positive results. But at least a legal framework would have to be agreed upon by both Congress and the President in the typical legislative process, and hopefully that would ensure greater accountability in the hopefully rare instance that bailouts are deemed necessary.