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[MUSIC]
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Hi, I'm Jonathan Burke, Professor
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of Finance in the Graduate School
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of Business at Stanford university.
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>> And I'm Jules van Vincebergin,
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a Finance Professor
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at the Wharton School of
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the University of Pennsylvania.
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>> And this is
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the All Else Equal Podcast.
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Welcome back, everybody.
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Before we get started today I just
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want to make a call out to our
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listeners and thank them for
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listening, especially the listeners
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who subscribed.
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It's really amazing to see
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how many subscribers they are and
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it's really motivating in terms of
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what we're doing here.
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>> Today we're going to talk about
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corporate bankruptcy.
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And the All Else Equal
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mistakes we're going to talk about
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is the assumption that the act of
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declaring bankruptcy itself is
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precipitating the end of the firm.
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That is, the bankruptcy decision
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itself is consequent in ending
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the firm's existence.
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And I think that's a pretty common
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assumption, Jonathan.
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Usually when we see that a firm
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declares bankruptcy people think,
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that's the end of it.
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>> Yeah, as seemingly
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obvious as this assumption is,
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it's a mistake, okay?
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So let's think about that.
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There are two reasons a firm would
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enter bankruptcy.
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One reason is the underlying
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business is failing.
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And so I think that happens when
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the cost of continuing the business
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is higher than what it actually
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brings in in revenues.
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>> Exactly.
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>> Or alternatively, underlying
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business is perfectly fine, but
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the firm just has too much debt.
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So one example that I think
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is interesting to discuss
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here is Hertz, right?
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So Hertz doing the COVID
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crisis had a pretty rough time, and
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at some point they decided
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to declare bankruptcy.
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And then 12 months later,
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suddenly Hertz has emerged
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out of bankruptcy.
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So I think that is a clear
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indication that if we have to
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choose between the two reasons for
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bankruptcy, one was the business is
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failing, the other one was they
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just had too much debt and they had
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to somehow reorganize that.
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I think the second is the more
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plausible explanation.
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>> Well, but
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the other thing to remember is,
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even during the bankruptcy,
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you could still rent Hertz cars.
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In fact, from a consumer's
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perspective, they didn't even
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know about the bankruptcy.
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Hertz looked just like Avis.
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Why don't we talk about how
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bankruptcy came to be?
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Originally when you didn't pay your
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debts back, they put you in prison,
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and we as a society realized there
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were some moral issues with that.
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And so we came up with bankruptcy
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law, which essentially was
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a way for debtors to collect as
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much as they could.
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And obviously you can't put
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a corporation in prison.
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So in that sense,
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corporate bankruptcy is just
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an orderly process for the debtors
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to collect as much as they can.
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They're obviously not going to be
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fully paid back, otherwise wouldn't
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have a bankruptcy, but they're
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going to get as much as they can.
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>> And so the debt holders
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have a very clear choice to make.
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Whenever a firm is declaring
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bankruptcy, given the fact that
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the debt holders want to get back
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as much as they can, how will they
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get back as much as they can?
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On the one hand they can say,
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let's just sell off every piece
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of property that Hertz has.
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Let's sell off all the cars,
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that sell off all the real estate,
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and let's see how much money we
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can recoup that way.
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The alternative for the debt
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holders is to say, you know what,
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actually Hertz is worth more to us
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by just continuing operating it and
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try to recoup as much money as we
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can that way, right.?
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>> Right, so really what bankruptcy
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is in a corporate situation is
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simply a change of control.
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Before the bankruptcy, the equity
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holders controlled the firm, or the
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shareholders controlled the firm.
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After the bankruptcy,
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the shareholders get nothing and
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the debt holders get all their
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assets, so they take control of
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the firm and they make decision to
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continue operations or
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shut the firm down, but the debtors
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will make that decision.
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So anybody who has lent money to
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the firm gets control of the firm.
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So the really insightful thing to
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realize is all
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a corporate bankruptcy is is
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a change of control.
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>> So now let's generalize this
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a bit and just think about two
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identical firms.
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The firms operate exactly the same
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type of business,
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they sell the same products,
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they have the same employees,
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everything is the same.
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The only thing that's different
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between these two firms is
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how much debt they have.
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Now the question is,
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is the decision to continue
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operating the business,
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is that in any way dependent on how
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much debt we have, okay?
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>> Let's assume that the firm with
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debt declares bankruptcy, but
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assume the firm is healthy,
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what's going to happen?
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>> Well, in that case,
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if the business model is fine, and
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it's more profitable to continue
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operating the firm compared to
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shutting it down,
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he'll just continue.
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>> Now the all equity
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firm obviously can't declare
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bankruptcy because there's no debt
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in that firm, but it's identical,
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it will also continue operating.
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So both firms will
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continue operating.
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Okay, let's take the alternative.
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>> So now we're looking at a firm
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where the cost of continuing
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operation is higher than
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the revenue would brings in.
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So from a business decision making
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point of view, the better decision
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is to shut down the firm.
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>> So when the debt holders take
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possession of the firm,
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what are they going to do?
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They're going to
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liquidate the firm.
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But obviously the same must be true
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of the all equity firm.
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It's not a good business decision
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of that firm to keep operating.
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We just said,
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you're better off shutting it
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down than keep operating.
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So the equity holders in that
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firm will also shut it down.
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And so yet again,
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both firms make the same decision.
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>> So we've just proven
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the point where we started off
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the discussion.
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And that is the act of declaring
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bankruptcy itself has no impact on
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the question of whether it's a good
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business decision to keep the firm
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operating or not.
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So now the question is,
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can we generalize this argument if
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the way that the firm is financed
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with debt and equity and
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in what ratio doesn't matter for
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this important business decision,
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does it matter for
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any other business decision that
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we're making inside the firm?
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>> And the answer is no,
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it doesn't matter,
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using the same intuition.
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Financial economists call this the
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Modigliani and Miller Proposition,
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named after Modigliani and
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Miller, who won the Nobel Prize for
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pointing it out.
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Ironically, they were not the first
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people to derive it.
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The first person to
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have this important
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insight was John Burr Williams, and
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I think the Nobel Prize Committee
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erred in not giving the Nobel Prize
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to John Burr Williams, when they
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gave it to Modigliani Miller.
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>> Isn't there some funny joke
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about this, about propositions?
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>> Yes, my good friend
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Mark Rubinstein used to
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say if a proposition is named
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after somebody,
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it almost certainly means they were
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not the first people to derive it.
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>> So let's use John Burr Williams'
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argument to understand it better.
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The way that he went about
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it was as follows.
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He said, suppose that there's only
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one person who owns both the equity
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and the debt of the firm.
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Now what could it possibly matter
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for the business decision how
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to proceed in what ratio that
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person holds both those pieces.
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>> In other words, it's just
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relabeling, that person has all
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the cash flows the firm generates.
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So you can label one as debt and
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equity, but the total cash flows
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are the same, and so
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that person isn't going to care.
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And that's how John Burr Williams
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derived the very important insight
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that how the firm finances itself
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doesn't affect the underlying
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business model of the firm.
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>> And so there is a very important
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all else equal mistake that follows
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from this wrong way of thinking
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about the debt equity ratio.
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And that is that many people,
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often bankers, claim that you
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should always finance your firm
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with debt because they say debt is
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cheaper because she can get it at
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a lower rate than having to entice
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equity holders to invest with you.
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And for that reason, you should
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always finance your firm with debt.
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>> And that's an all else equal
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mistake because what it's ignoring
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is the reason debt has a lower.
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Return is because it's less risky.
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Equity is more risky than debt and
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has a higher return.
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It's no cheaper,
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it's just your investors are taking
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on different risks.
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>> And in fact, if as a firm you
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take on more debts, you are
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actually making the equity riskier.
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Because you will have to pay
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the debt holders back first before
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the equity holders get anything.
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>> Exactly, the equity of an all
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equity firm is less risky than
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the equity of a firm with debt.
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But the overall riskiness of
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the firm is the same and
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Berwyn said that.
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Look, if I have an all equity firm
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that's going to have a certain
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level of risk, if I'm the single
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investor in that firm or if
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I've a firm with debt and equity,
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certainly my debt and equity is
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going to have different risks.
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But I'm getting the same cash flows
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so my overall risk is the same as
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it is for the all equity firm.
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>> And now finally,
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let's circle back to the very
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beginning of our discussion.
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In making the mistake of equating
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bankruptcy with liquidation,
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people often make the mistake of
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subsidizing firms when there's no
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reason for it.
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We've heard a lot about when firms
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get in trouble,
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we need to bail them out.
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But let's think a little carefully
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about what that bailing out
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actually implies.
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>> Well, when would be a situation
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where you've to bail out a firm?
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Because as we discussed, if
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the firm is a good firm to operate,
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the debt holders will
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keep operating it, so
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there's no reason to bail it out.
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So the only time you have to
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bail it out is if the firm doesn't
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make sense to operate.
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And normally when we say we have
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firms that don't make sense to
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operate, the optimal thing is to
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shut them down.
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The only condition under which
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you wouldn't want to shut the firm
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down is there some externality for
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the firm operating.
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>> So for example, there could be
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suppliers of the firm or
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other parties that are connected to
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the firm.
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In the case of General Motors,
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I think this argument was made
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quite forcibly that too many people
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dependent on General Motors to be
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couldn't let it fail and the
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externalities were large enough.
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>> But the problem of course Jules
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is, if I am the debt holder I would
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like to subsidize.
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I could easily argue that I'm going
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to shut the firm down if
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the subsidy didn't exist,
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knowing full well that in fact that
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wouldn't be my case.
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So we have to be very careful when
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debt holders announce or
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threaten to shut the firm down.
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We have to actually make sure that
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that's what they're going to do.
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>> Yeah, because anybody likes to
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receive a subsidy if he can.
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So Jonathan, one last thing to
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discuss then though is, when
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you look at the surveys of CFOs and
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you ask CFOs what is the most
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important part of your job?
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They do indicate that how much debt
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and equity financing they should
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use is at the top of that list.
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So what are we missing?
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>> Well, I think this will we
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talked about he was pretty
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simplistic and
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then in the real world
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the decisions are more complicated.
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We spoke about one
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friction already,
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which is the externalities, right?
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The first kind of externalities,
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but there are other
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frictions because obviously
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bankruptcies cost the process.
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You have to hire lawyers, and
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the other thing about bankruptcy is
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contracts don't survive.
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So not just the debt contract, you
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could have other contracts in the
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firm that don't survive bankruptcy.
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So it could be difficult to
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write contracts if the firm
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has a lot of debt.
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Because the person on the other
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side of the contract anticipates if
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there's a chance of bankruptcy and
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this contract might not be honored.
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>> Like the labor contract?
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>> Exactly, there's a good example,
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the labor contract.
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So workers inferred in a lot of
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debt might worry that a labor
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contract that says they can't be
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fired would be violated in the case
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of bankruptcy.
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>> And then there is another
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very important friction and
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that friction is, and we've
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discussed this friction before.
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Financing with debt has a benefit
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because interest payments are tax
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deductible.
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Because your tax bill is computed
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on the after interest payment
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profits not the before interest
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payment profits.
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And so by financing your firm
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more with debts,
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you can keep more of the money for
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the stakeholders in the firm and
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not give it to the government.
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And that increases the value of
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the firm but also sometimes we call
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the tax shield.
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>> And that is one of my big
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concerns about how we tax.
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What effectively the government's
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doing is encouraging firms to hold
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more debt.
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If the firm has more debt,
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it's harder to write long-term
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contracts.
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So it's harder for the employees to
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write a contract with a firm that
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gives them job security.
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Now, job security is a pretty
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useful thing.
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And we're moving risk
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from the employee to the firm,
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which is the optimal thing to do.
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So making their contract harder to
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write makes employees harder to
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hire.
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And it's overall bad I think for
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the economy as a whole because
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having that insurance is good for
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everybody.
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>> Agreed.
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So let's summarize.
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We started off with in a world
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without these frictions that we
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discussed at the end,
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the trade off between how much debt
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and equity you should hold,
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there isn't much there.
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It doesn't really matter how you
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finance yourself whether it's with
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equity or debt.
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We illustrated this with a very
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simple decision to make,
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which was the decision to continue
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operating or not.
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And we concluded that for that
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business decision it didn't matter
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how you financed yourself and
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came been generalized.
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Adam came to the conclusion that
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for any business decision in this
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frictionless world, it wouldn't
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matter how you financed yourself.
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But to make it more nuanced at the
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end, I do think we need to include
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these frictions in the discussion.
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How important are these frictions,
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how important are these
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labor contracts?
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How valuable is the fact that debt
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is text deductible, how costly is
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the bankruptcy process for
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everybody involved?
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>> That's a very important
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insight Jules.
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In other words, it is important
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when people claim that the level
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of debt matters, that they also
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explain what friction is causing it
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to matter.
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If they don't explain what
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friction is causing it to matter,
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I'm highly suspicious that in fact
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they want to get something out of
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you and they're going to make
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a blecious argument to do that.
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>> And just saying the rate of
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return on debt is lower than
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the rate you have to pay to equity
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holders to entice them to invest,
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that argument on its own doesn't
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specify friction, and for
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that reason is not a useful
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argument to use.
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>> Okay, Jules, so I think now it's
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time to introduce our guest.
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>> We're very happy to have our
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guest today, Jim Millstein.
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Jim is the Co-Chairman of
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Guggenheim Securities, investment
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banking in capital markets business
00:14:20
of Guggenheim Partners, a global
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investment and advisory firm.
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From 2009 to 2011, Jim was
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the Chief Restructuring Officer at
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the US Department of the Treasury
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when the Obama administration
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bailed out General Motors.
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In that role he was also
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responsible for oversight and
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management of the department's
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largest investments
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in the financial sector and was
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the principal architect of AIG's
00:14:41
restructuring and recapitalization.
00:14:44
Prior to joining the treasury,
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Jim served as Global Co-Head of
00:14:47
Corporate Restructuring at
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Lazard from 2000 to 2008.
00:14:50
An authority represented the United
00:14:52
Auto Workers in connection with the
00:14:54
restructuring of their contractual
00:14:57
relations with GM, Ford,
00:14:58
and Chrysler from 2005 to 2007.
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Jim welcome to the show.
00:15:03
>> Nice to be here, thanks for
00:15:04
having me.
00:15:05
>> So Jim you spent your whole
00:15:07
career dealing with firms in
00:15:09
bankruptcy.
00:15:10
Let me ask you a question
00:15:11
just as a summary of all
00:15:12
the bankruptcies you've dealt with.
00:15:14
What fraction of the time was
00:15:16
the end result liquidation versus
00:15:18
a transfer of control?
00:15:20
>> I've probably worked on 400
00:15:21
different restructurings over
00:15:23
the course of the last 42 years
00:15:25
doing this kind of work.
00:15:26
And I would say really only twice
00:15:29
over that period has it resulted in
00:15:32
a liquidation.
00:15:34
The chapter 11 of
00:15:35
the United States Bankruptcy Code
00:15:37
was really designed to facilitate
00:15:39
the reorganization of companies
00:15:40
rather than their liquidation.
00:15:42
Liquidation value to use legally
00:15:45
as a standard by which plans of
00:15:48
reorganization are judged.
00:15:50
But it is a very rare bankruptcy
00:15:52
that ends up liquidated.
00:15:54
>> So Jim, obviously the transfer
00:15:56
of control from equity holders to
00:15:58
debt holders is not simple,
00:16:00
it involve costs.
00:16:01
What do you think the major costs
00:16:03
are and how important are they in
00:16:06
the bigger picture
00:16:07
of the company as a whole?
00:16:09
>> Well, the friction costs of all
00:16:11
the professionals involved in
00:16:13
a large case,
00:16:14
those can be quite considerable.
00:16:16
But the bankruptcy courts,
00:16:17
the judges themselves have gotten
00:16:19
relatively good at policing
00:16:21
the running up of
00:16:22
unnecessary fees and expenses.
00:16:24
But the truth is that in a large
00:16:27
bankruptcy, all of the parties
00:16:30
retain specialized advisors.
00:16:32
And so you can have a conference
00:16:35
goal or a court hearing or
00:16:36
a negotiation session.
00:16:38
And when you look around,
00:16:40
there are 100 people billing their
00:16:43
time to a creditor,
00:16:44
or in many cases,
00:16:45
to the estate itself.
00:16:47
And so those friction costs
00:16:49
are real.
00:16:51
>> Okay, the costs are substantial
00:16:53
in absolute terms.
00:16:54
But in relative terms versus
00:16:55
the value of the corporation,
00:16:57
it's still not more than in
00:16:59
the percentage terms.
00:17:00
One, two, three,
00:17:01
four percent of the value of
00:17:03
the corporation of all the costs
00:17:05
associated with the bankruptcy, or
00:17:07
am I wrong about that?
00:17:08
>> It's very hard to give a rule of
00:17:11
thumb.
00:17:12
There are cases such as the Caesars
00:17:14
bankruptcy on which I worked where
00:17:17
the professional fees were running
00:17:19
a couple of $100 million a year.
00:17:22
But at the end of the day,
00:17:24
the estate, the reorganized company
00:17:26
was worth $30 billion.
00:17:28
So would you pay $200 million
00:17:30
to right size the balance sheet of
00:17:32
a company that ultimately was worth
00:17:34
$30 billion?
00:17:35
Yeah, you would.
00:17:37
Would you pay $3 million to right
00:17:39
size the balance sheet of a company
00:17:42
ultimately worth $50 million?
00:17:44
You'd be very careful in
00:17:46
supervising the professionals
00:17:49
involved in that size of case to
00:17:51
keep the fees down.
00:17:54
>> So, Jim, on that note,
00:17:55
do you think the bankruptcy process
00:17:57
is the most efficient way to handle
00:18:00
financial distress?
00:18:01
Or do you think there's
00:18:02
a lot of room for improvement?
00:18:04
>> Look, there's always room for
00:18:05
improvement.
00:18:06
I sat on a commission organized by
00:18:08
the American Bankruptcy Institute
00:18:09
called at the Commission to
00:18:11
Study Reform of Chapter 11.
00:18:12
And we came up with probably a 400
00:18:14
page tome that had a series
00:18:16
of recommendations to improve
00:18:18
the process.
00:18:19
But when you compare the legal
00:18:21
framework for
00:18:21
reorganizations applicable iin
00:18:24
the United States to those
00:18:25
available in other jurisdictions,
00:18:27
really Chapter 11 is probably
00:18:29
the most efficient reorganization
00:18:32
statute in the world.
00:18:33
Indeed, over the course of my
00:18:35
career over the last 40 years,
00:18:38
all of the so-called developed
00:18:40
countries and
00:18:41
many of the developing countries
00:18:43
have modernized their bankruptcy
00:18:46
statutes really after Chapter 11.
00:18:49
Because it has been
00:18:50
such a successful form in
00:18:52
which to salvage the valuable bits
00:18:55
of an operating business and
00:18:57
allow it to reorganize.
00:18:59
>> Could you comment a bit on
00:19:01
how you view bailouts?
00:19:02
So, for example,
00:19:03
the General Motors bankruptcy,
00:19:05
I think a lot of academics viewed
00:19:07
that as a watershed event in
00:19:08
the sense that the government
00:19:10
bailed out General Motors.
00:19:12
But absent that government support,
00:19:14
don't you think the company would
00:19:15
have been reorganized anyway?
00:19:17
>> Actually, I think most people
00:19:19
who are not bankruptcy
00:19:20
professionals don't understand what
00:19:23
happened in the GM bankruptcy.
00:19:25
The government really behaved
00:19:27
like an aggressive activist vulture
00:19:30
fund, and it employed tactics very
00:19:32
similar to those that the most
00:19:34
sophisticated investors
00:19:36
in Chapter 11 employ to facilitate
00:19:38
the reorganization of the company.
00:19:40
Do I think GM would have
00:19:41
survived without
00:19:42
the government's intervention?
00:19:44
Not at that time,
00:19:45
it had a severe run on
00:19:46
the liquidity available to it, and
00:19:49
it would have had to shut down.
00:19:51
Now, one of the reasons I think
00:19:53
most people don't understand and
00:19:56
unfairly criticized the government
00:19:58
and its capacity a dip lender in
00:20:01
that proceeding is that
00:20:02
the government went to the existing
00:20:05
secured creditors of GM,
00:20:07
the people first in line to receive
00:20:09
the value of GM's assets.
00:20:11
And said,
00:20:12
hey, if you guys want to put up
00:20:15
the dip, if you want to finance
00:20:17
it in Chapter 11,
00:20:19
please go right ahead.
00:20:21
And it was only after those
00:20:23
creditors who really were entitled
00:20:25
to whatever the value of GM was
00:20:27
because they had liens on virtually
00:20:30
all of its assets.
00:20:31
It was only after those creditors
00:20:33
declined the offer to
00:20:35
provide financing.
00:20:37
Now, remember,
00:20:38
when this all occurred,
00:20:39
this was in January of 2009,
00:20:41
in the middle, probably the deepest
00:20:44
point in the financial crisis.
00:20:45
And in the same way that
00:20:47
the federal government was a lender
00:20:49
of last resort through the fed,
00:20:51
through the FDIC,
00:20:52
through the Treasury Department to
00:20:55
the financial industry.
00:20:56
It turned out that the most
00:20:58
sophisticated distressed and
00:21:00
special situation investors who
00:21:02
had piled into GM secured debt were
00:21:04
unwilling to step up at that
00:21:06
moment of crisis and keep GM alive.
00:21:08
And so in order to save the jobs,
00:21:10
in order to keep the factories
00:21:12
running, in order to ensure that
00:21:14
the largest domestic automobile
00:21:16
manufacturer didn't shut down in
00:21:19
the middle of the crisis,
00:21:20
the government was forced
00:21:22
to step in where private investors
00:21:24
refused to tread.
00:21:26
>> How do you know those investors
00:21:28
weren't even more sophisticated,
00:21:31
knowing full well that the Obama
00:21:33
administration wasn't going to let
00:21:36
GM fail?
00:21:37
And so they didn't
00:21:38
provide the financing because
00:21:40
they anticipated the bailout.
00:21:43
>> Yes, well, the reason academics
00:21:45
have swirled around this and tried
00:21:48
to comment on it is because those
00:21:50
investors made a huge stink when
00:21:52
the government then after becoming
00:21:55
the dip lender sought to get the
00:21:57
company quickly out of bankruptcy.
00:22:00
As many of them would have done in
00:22:02
a similar position had they made
00:22:05
the dip loan.
00:22:06
Because a company as complex as
00:22:08
GM with international operations, I
00:22:11
mean, really very complicated, very
00:22:14
hard to run international company
00:22:16
in one bankruptcy jurisdiction.
00:22:19
So GM's assets were sold as a going
00:22:21
concern to a newly formed entity,
00:22:23
in effect created by
00:22:24
the government, to purchase the
00:22:27
assets and rollover its STIP loan
00:22:29
into equity in the new company.
00:22:31
And again, the creditors got
00:22:33
the proceeds of that sale,
00:22:35
but they weren't
00:22:36
happy with the price that was paid.
00:22:39
And yet none of them, and no
00:22:40
one else, no other auto companies
00:22:42
showed up to pay a higher price.
00:22:45
>> So just to summarize, so you
00:22:46
think that if the bailout hadn't
00:22:48
happened, then in fact, General
00:22:51
Motors would have been liquidated?
00:22:53
>> I think it would have shut down.
00:22:55
And the question is, how expensive
00:22:57
would it have been to restart?
00:23:00
I mean, this was the analysis that
00:23:01
was being done in the Treasury
00:23:02
Department at the time.
00:23:04
How many other affected businesses
00:23:06
would shut down if GM shut down?
00:23:07
All of the car dealerships that
00:23:09
depended on GM, all of
00:23:11
the suppliers that depended on GM,
00:23:13
all of the auto body shops that
00:23:15
depended on parts from GM suppliers
00:23:17
who would have been shut down.
00:23:20
I can't remember the name of
00:23:21
the consulting firm in Detroit who
00:23:23
generally consults for
00:23:25
auto companies.
00:23:26
The estimate by that firm
00:23:28
whose name I forget at the time was
00:23:30
that had GM shut down,
00:23:32
3 million jobs would have also
00:23:34
stopped right then and there.
00:23:36
Because of the integrated supplier,
00:23:39
dealer, and customer networks that
00:23:41
depended on GM's operations.
00:23:43
And so from a macroeconomic point
00:23:46
of view, I think the government
00:23:48
rightly decided that in the middle
00:23:50
of this financial crisis to have
00:23:53
the largest American auto
00:23:54
manufacturer shut down,
00:23:56
with all of the attendant job
00:23:58
losses in the supplier and dealer
00:24:01
networks and service networks.
00:24:04
Would have made a bad situation
00:24:06
worse, and that the cost of
00:24:08
restarting all of those businesses
00:24:10
would have far exceeded any subsidy
00:24:13
that the government might otherwise
00:24:16
have had to convey to GM as part of
00:24:18
this process.
00:24:20
>> I mean,
00:24:21
Jim, the only thing I would say is
00:24:23
those numbers are ignoring a very
00:24:26
important thing, and
00:24:28
that is, cars need to be sold.
00:24:30
I mean, people buy car.
00:24:31
So the numbers assume that GM would
00:24:34
shut down and no other car
00:24:36
manufacturer would sell those cars,
00:24:38
that those cars just would never
00:24:40
get sold.
00:24:42
And I think that's probably
00:24:43
an exaggeration.
00:24:45
>> No, I can see that Ford and
00:24:47
Chrysler, well, not Chrysler, but
00:24:49
[LAUGH] Ford and Japanese and
00:24:51
European car manufacturers
00:24:53
would have tried to step in.
00:24:55
But the loss in productive capacity
00:24:58
across the supplier networks,
00:25:00
I mean, part of the analysis was
00:25:03
a few look at the suppliers to GM
00:25:05
of a given part.
00:25:06
They're also suppliers to Toyota,
00:25:09
and to Ford, and to Hyundai.
00:25:12
And so if that supplier shuts down,
00:25:14
the contagion effects on all of
00:25:17
the other auto industries might be
00:25:20
very difficult to contain.
00:25:23
So in effect, the so called bailout
00:25:25
of GM was actually a bailout of
00:25:27
the supplier network, and
00:25:28
of all of the other auto companies
00:25:30
manufacturing in the United States.
00:25:33
Because had the tier one suppliers
00:25:35
to GA who are also suppliers to
00:25:37
the rest of the industry shut down,
00:25:40
the rest of the industry
00:25:42
would've shut down.
00:25:43
So your premise that there might
00:25:45
have been someone to step in,
00:25:47
theoretically, yeah.
00:25:50
That GM's market share might have
00:25:51
been picked up from someone else,
00:25:53
but less.
00:25:54
The GM bankruptcy caused the rest
00:25:56
of the supplier base to shut down,
00:25:57
which causes the rest of
00:25:58
the industry to shut down.
00:26:00
So the conclusion was reached that
00:26:02
the loss of productive capacity and
00:26:04
the contagion effects of a GM
00:26:06
shutdown were far greater than any
00:26:08
subsidy that the government might
00:26:11
have had to convey to get
00:26:12
this all done.
00:26:14
Well, thank you very much.
00:26:15
>> Thanks so much, Jim.
00:26:16
>> Thanks for having me, guys.
00:26:19
>> Jules,
00:26:19
what the discussion really
00:26:21
highlighted is just how difficult
00:26:24
it is to make decisions in a crisis
00:26:27
situation like a GM bankruptcy.
00:26:30
Jules, there's so
00:26:31
many things that could happen and
00:26:33
there's so many contingencies.
00:26:36
It's a very difficult time for
00:26:38
the government to make decisions
00:26:40
like this.
00:26:42
>> Yeah, but Jonathan,
00:26:43
I also think it's important to not
00:26:45
make All Alse Equal mistakes
00:26:47
because those types of hypothetical
00:26:49
scenarios are particularly privy to
00:26:51
making all else equals mistakes.
00:26:53
Where you just say,
00:26:54
if we had done this differently,
00:26:55
this would have happened.
00:26:57
But we do need to take into
00:26:58
account, all the other parties that
00:27:00
are involved in the other decisions
00:27:02
that they would have made had we
00:27:04
done something differently.
00:27:06
And so that makes these
00:27:07
hypothetical scenarios so hard.
00:27:09
>> I agree.
00:27:10
It's essential not
00:27:11
to make the All Else Equal
00:27:13
mistake in those situations.
00:27:16
>> So next episode, we're going to
00:27:18
go back to our usual biweekly
00:27:19
schedule with a conversation about
00:27:21
labor contracts.
00:27:22
And we just saw in the discussion
00:27:24
about bankruptcy, how important
00:27:26
labor contracts can be and
00:27:27
how important it is that firms can
00:27:29
stick with labor contracts.
00:27:31
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00:27:32
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00:28:00
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