Monthly Archive for December, 2008Page 3 of 5

Bailout or Bankruptcy: Potential Consequences of Letting the Big 3 Go Bust

general-motors-ford-and-chryslerGM, Ford, and Chrysler are all clamoring to be next in line to receive billions of dollars of taxpayer money. Should they get it? If they don’t, will bankruptcy lead to the economic catastrophe recently forecasted by Big 3 executives on Capital Hill?

Absent a bailout, the Big 3 are looking at Chapter 11 bankruptcy. Chapter 11 is a corporation-specific type of bankruptcy that calls off the dogs and gives a company breathing room to restructure. In the case of the big 3 automakers, most experts agree that Chapter 11 bankruptcy would cut jobs, gut costly labor contracts with unions such as UAW, eliminate pension obligations to current and future retirees, and close unproductive factories.

Although shedding billions in health care costs, pension benefits, and operating costs might look good for a company’s balance sheet, the picture is not so rosy for everyone else. The UAW was a major supporter of President-elect Obama and will not be pleased if the democratic government they helped elect turns their back on them. Furthermore, where will they go for health care? Many-especially those who will inevitably lose their jobs-will go to Medicaid.

Then there are pension benefits. What happens when a company like GM can’t make its pension obligations? Under the Pension Benefit Guaranty Corporation, the federal government insures pension plans in the American auto industry; this agency is already $14 billion in debt.

Lastly, one of the most important parts of corporate restructuring under Chapter 11 is debtor-in-possession financing. This allows a bankrupt corporation to take loans to stay afloat, with the creditors of the needed capital jumping to the front of the claims line. With the economy in a tailspin and credit lines essentially non-existent however, economists like Nobel Prize winning Paul Krugman worry that no one will make any loans. No loans means no production; no production means this turns into a Chapter 7 liquidation.

No one wants to see what will happen if the big 3 simply cease to exist. Experts predict that the potential ripple effect would cost 2.5 million jobs in the various industries that depend on companies like GM. Many unemployed would inevitably end up in government unemployment lines.

There is no question that fundamental restructuring needs to be done. Some job loss and benefit cutting is inevitable. A bailout with strict conditions similar to a bankruptcy hearing, however, could prevent a far larger potential catastrophe. The government’s loan would operate similar to debtor in possession financing necessary to keep the production lines rolling and save millions of American jobs. Significant strings could be attached: the Big 3 would need to do major restructuring of their labor contracts, close unproductive plants, get rid of incompetent management, and make fundamental changes to their business model. Some creditors may need to take a significant pay cut or agree to restructure their claims. At the same time, some of the more horrific consequences of liquidation and massive unemployment would be avoided, and at a fraction of the cost to our economy should the big 3 all go bust.

Just like the original bailout, none of the options look good. Sometimes, however, you have to pick the lesser of two evils.

San Francisco Zoo Faces Vicious Legal Battle

Remember Kulbir and Amitpal Dhaliwal – the brothers who allegedly taunted a tiger at the San Francisco Zoo, who then escaped from its enclosure, mauling them and killing one of their friends?  Well, the Dhaliwals are back… and they’re suing.  The brothers recently filed a lawsuit in federal court against the city and its police department, as well as the zoo and its PR firm.  The brothers claim that the tiger’s enclosure did not meet national safety standards and the zoo engaged in a smear campaign against them following the attacks.

What theories will the Dhaliwals pursue?  Would strict liability for ultra-dangerous activities apply?  Under this theory, some activities are so dangerous that no amount of precautionary measures will insulate a handler from liability.  According to precedent from the First District of Appeal, the doctrine is not applicable to a city carrying on government functions, including maintaining a zoo; the city is merely responsible for harm created by a “dangerous or defective condition” on public property that officials should have known about but neglected to fix. 

However, according to legal experts this 1952 case may no longer be binding since California has revised its laws regarding suing governmental agencies.  Additionally, unlike in 1952, the SF Zoo now charges admission; it therefore owes a greater duty of care toward its guests.  Moreover, the zoo is now managed by the San Francisco Zoological Society, a non-profit organization that remains strictly liable under the ultra-hazardous activities doctrine. 

The city may try to rely on its contract with the Zoological Society which insulates it from liability unless a city employee is found to be at fault.  According to legal analysts, however, it should be pretty easy to show fault given that the zoo director admitted the wall around the tiger fell four feet below national safety regulations, and Tatiana (the tiger) previously attacked a trainer. 

What role will the Dhaliwals’ supposed negligence – i.e. taunting – play in the case?  Did they “assume the risk”?  Probably not.  Given how common (and wrong) it is for zoo patrons to tease animals, the zoo should have been aware of the need to contain the tiger in the event that it became aggressive after being provoked. 

While some say that suits like this ultimately serve a public safety purpose, I wonder if the legal costs incurred by the zoo in defending against this suit will actually make the place more dangerous.  Zoo officials have announced it will impose budget cuts of $700,000, largely related to the suit, and will consequently cut salaries and part-time workers.

Show Me The Money: Federal Court Challenges the Governator

Recently, California Governor Arnold Schwarzenegger revealed that the state needs over $8 billion in spending cuts and additional taxes.  Further, California owes millions to the state prison system, which must make significant improvements to its medical system in order to comply with constitutional standards.  This news comes as a slap in the face to many Californians who are suffering through a dire economic crisis and voted against Proposition 5, a ballot measure which would have allocated money to improve mental health services for prisoners.

In 2006, U.S. District Court Judge Thelton Henderson of San Francisco took control of the California prison medical system after reports indicated severe neglect and incompetence caused about one inmate to die per week.  In order to fix the system, however, money will need to be taken from vital services such as schools, the university, or the police department. 

So far, California has refused to show Judge Henderson the money.  I think California Attorney General Jerry Brown is wise in refusing to turn over more funds to a bureaucracy that has failed to make progress despite spending even more for healthcare than outside healthcare operators.  Brown has asked state and prison officials to draw up specific construction plans which only implement the minimum-needed improvements.  However, the state Legislature has twice rejected bonds which would cover the cost of drafting such plans.   

Although the Ninth U.S. Circuit Court of Appeals granted California a temporary reprieve, eventually the state will need to pay up.  And if Schwarzenegger and State Controller John Chiang are found in contempt, they could face harsh fines-possibly $2 million per day-until they surrender the money.  Hopefully officials can work together to make efficient plans for improvement before even more taxpayer dollars are wasted.

Dick Cheney: Criminal Mastermind or Sound Policy Advocate?

Blog of Legal Times reported recently that Willacy County District Attorney Juan Guerra has secured an indictment against Vice President Dick Cheney and former Attorney General Alberto Gonzalez in South Texas. The indictment, which has not yet been signed by a judge, accuses the two of conflict of interest by pushing for increased crackdowns and incarcerations of illegal immigrants while simultaneously investing in the Vanguard Group, an investment firm with substantial investments in private prison firms. Critics claim the outgoing lame-duck Guerra has a political axe to grind, and wants to do as much damage before his term ends at the end of the year.

Before I continue, let me just put this on. *Dons tin-foil hat* In an interesting addition to this Wall Street Journal story regarding the future profitability of private prison companies such as Corrections Corp. of America (CCA), it turns out Vanguard invests in both CCA and Geo Group. (Both are currently experiencing large profits and expect this trend to continue.) So while the executive branch of our federal government increases its prosecution of illegal immigrants under “Operation Streamline,” (leading to an increased prosecution rate of 72.7% compared to last year) our vice president and his attorney general are allegedly investing in the companies that our government is contracting with to detain these prisoners. Interesting. (In Cheney’s defense, he is a member of the legislature, right?) *Removes tin-foil hat*

Immigration officials tout the new strategy of prosecuting, rather than deporting, illegal aliens as a success. It discourages repeat offenders and hopefully makes others think twice about taking the risk to cross the border illegally. Economists such as the University of Chicago’s Jeffrey Grogger also point out that increased immigration from 1960 to 2000 was the likely cause of a 4% drop in income for American born unskilled laborers.

This particular case will probably go nowhere. Guerra has a reputation for being a little out there, and he was thoroughly trounced in elections in November. Furthermore, no one doubts that illegal immigration needs to be dealt with. Nonetheless, it would be nice if our Vice President’s wallet did not get fatter after ever significant policy decision made by his administration.

Taxation Without Representation? The Aftermath of Prop 8 Begins . . .

“Let them march all they want, as long as they continue to pay their taxes.”

-Alexander Haig

Recently, California voters narrowly passed Proposition 8, which effectively bans same-sex marriage in the state.  One reaction to the news is anger-and protest.  Musician Melissa Etheridge gained national attention for her blog in which she vows to stop paying taxes until she’s afforded the same rights as heterosexual citizens.  It seems that sizeable numbers of the LGBT community are planning to follow Etheridge’s lead, which leads me to wonder what consequences they will face. . . .

According to an official IRS report, filing tax returns in not voluntary and citizens do not have the right to withhold tax payments based on moral objection. The IRS cites a large body of case law supporting its position, and effectively knocks down the argument that citizens can refuse to pay income taxes based on moral grounds under the First Amendment, which states:  “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”  The IRS vigorously asserts that the First Amendment does not grant citizens the right to refuse to pay income taxes based on religious or moral grounds, or because taxes are used to fund government programs that they oppose. 

OK, so the IRS seems pretty sure about its position-but how strictly does it enforce rules against conscientious tax objectors?  What’s actually happened to people who’ve refused to pay taxes based on moral considerations?  According to some members of the National War Tax Resistance Coordinating Committee, conscientious objectors to the war have faced unpredictable consequences.  While criminal prosecution is possible, this is pretty rare.  To be exact, since the 1940s, fewer than 30 people have been jailed for refusing to pay war taxes. 

The IRS is more likely to collect taxes through civil means.  Usually, the IRS sends notices to objectors’ homes and assesses penalties in an effort to intimidate them before it finally takes action-sometimes years later.  Final action may consist of garnishing wages, seizing bank accounts, or even seizing cars and houses.  Of course, some non-filers go unnoticed. . . .

While the tax contributions of Etheridge and other well-to-do citizens would surely be missed by the government, most people simply don’t have as much financial clout.  Further, only about 59% of all Americans pay federal income taxes at all.  Finally, the fines and interest the IRS assesses on protestors might leave the government with more money than if protestors had paid their taxes in the first place. 

It’s unclear if refusing to pay taxes will prompt the government to reconsider its position.  What is clear is that it will take a large and organized effort by the LGBT community to make a significant impact on government through tax resistance.