Bankruptcy and Capitalism

This is clearly a self-serving position for Branson to take, but his point is exactly right. Bankrupt firms should be allowed to fail. It is how capitalism works. Capitalism doesn't guarantee success. It rewards success and punishes failure.

In the U.S., capitalism is under attack. However, capitalism is failing because of Washington. For example, by supporting the large and technically-insolvent banks, our politicians are picking the winners, rather than leaving that job to the market. The failed large banks have been bailed out while smaller successful banks that avoided the financial disaster are further disadvantaged. These small "winners" should be taking market share from the failed banks and growing, but instead they find themselves subjected to higher FDIC insurance premiums, relatively higher funding costs, and ever more regulation. It's Washington that's broken.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Nice While It Lasted

The Supreme Court has lifted its stay on the Chrysler deal. It had been a pleasant 24 hours, thinking that just a touch of sanity still existed. It is both disheartening and frightening to see all three branches of our government ignore the rule of law "for our own good." I had hoped that the Supreme Court would shine a light on the Administration's legal steamrolling. That little Pollyannaish flicker of rationality has been snuffed.

link to Bloomberg article

In another legal development today, Obama proposed making "pay-as-you-go" the law. This would require Congress to offset any increased spending with an equal amount of cuts elsewhere. After pushing through a record massive "stimulus" package that is leaving us with a record massive deficit and after embracing trillions in government loans and guarantees, the Administration wants us to believe that it is and has always been fiscally conservative.

In his speech announcing the proposal, Obama said, "Paying for what you spend is basic common sense." The mind reels.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

American vs. Chinese Bankruptcy

Hat tip to my friends over at Calculated Risk for bringing the following LA Times article to my attention, "Some owners deserting factories in china."

First, Tao Shoulong burned his company's financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.

And then he was gone.

...As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China's worst manufacturing decline in at least a decade.

I don't want to condone disappearing bosses who run off with whatever cash remains and leave behind unpaid employees and suppliers, but there is a simple beauty and efficacy to this process. Capacity is immediately taken out of the market.

Entering this global downturn, it is clear that many industries are suffering from an excess of global production capacity given declining demand. One of the things needed for the global economy to find some support is for production capacity to adjust lower to meet the new lower demand. Basically, factories need to be shut down, and the sooner the better. The fact that Chinese capacity can disappear overnight is actually a good thing for rebalancing the global economy, especially since much of the excess capacity that was built in recent years was built in China.

When these Chinese bosses disappear and their factories are shut down, that production is gone. Contrast that with the typical U.S. corporate bankruptcy. In the U.S., a troubled company files for bankruptcy "protection" and continues to produce. Typically, the stockholders are wiped out, and the bondholders are given new equity in the company in exchange for their debt. Then, the company emerges from bankruptcy, often with a production footprint not terribly different from its pre-bankruptcy days.

So, not only is it likely that zero to modest capacity was taken out of the system, but now the remaining competitors in that industry are facing this "new" old competitor which has a clean balance sheet and can more aggressively compete on price. This puts added pressure on the "survivors" who may have been fairly conservative and done everything right, but nevertheless now face a stronger competitor that would have been liquidated in a true free market. There's probably no better example of this than the U.S. airline industry.

We can bad mouth the Chinese bosses who are leaving their employees and suppliers in a bind, but at least they've found a way to quickly address the excess capacity overhang.

Disclosure: The Rubbernecker is long disappearing Chinese bosses and short the U.S. bankruptcy code.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.