Joshua Rauh and Luigi Zingales University of Chicago Booth School of Business Ultimate Stupidity

Time shows that the predictions of the high esteemed Rauh and his excellency Zingales are piece of garbage and horse manure.

 

 

 

If the US government provides GM with a $25 billion loan that allows it to

continue operating under current conditions for another year or two, the money would

simply be wasted and the problem postponed. GM would still be completely unable to

survive in the long term. We are very sympathetic towards the pain of the hundreds of

thousands of workers whose jobs are at stake. It is precisely because we are concerned

about their long term welfare that we oppose a bailout. Throwing money at a drug addict

only enables the addict to continue abusing drugs and ultimately shortens his life.

Similarly, government money aimed at a company that needs restructuring enables it to

avoid taking responsibility of its future, condemning it to a certain death.

Unfortunately, in this case the transformation of part of the debt into equity, as

proposed by one of us for banks, is not a solution either. GM’s problem is not a shortterm

liquidity crisis. A debt-for-equity swap would provide temporary relief from GM’s

short term obligations, but at the cost of continuing the bleeding and delaying the

restructuring. GM would just continue to run down the value of its assets. The only

difference with respect to a government bailout would be that investor money instead of

taxpayer money would be wasted.

We believe that a Chapter 11 bankruptcy filing for GM is the only possible

 

 

solution. However, we recognize that in the current environment, there are several likely

inefficiencies associated with the bankruptcy process. In particular, if we do nothing and

wait for GM to file for bankruptcy, which would likely happen in a month or so, we

would risk a bad outcome of the proceedings, namely an inefficient liquidation of the

company and a substantial amount of social disruption from the sudden loss of jobs. We

therefore propose that the government oversee a prepackaged bankruptcy for GM that

would give the company the restructuring it badly needs and avoid

Joshua Rauh and Luigi Zingales

University of Chicago Booth School of Business