Taxpayers
lose again
Bankruptcies can have the effect of making a mockery of the traditional buyer-seller arrangement. After all, a seller of goods or services to a restructured buyer is left with neither the original item nor the money to cover the agreed-upon price.
From a humanitarian and an economic perspective, however, there are times when individuals need the protection bankruptcy offers. Unexpected medical expenses, deaths, divorces and other catastrophic events can render even the hardest-working people unable to pay off their debts. While bankruptcy-filers are allowed to keep their car and home, they surrender most other items of value -- including their credit-worthiness.
It becomes a different story with companies, however. Corporate bankruptcies, whether necessitated by deteriorated market conditions, lawsuits, malfeasance or bad management practices, are not designed to give a needed lifeline to a person. They are designed to eliminate debt and protect the assets of certain investors. Secured creditors such as banks are first in line to be repaid, followed by unsecured creditors such as suppliers and bondholders. Curiously enough, the individuals who own stock generally lose everything when a company goes under.
If you don't believe corporate bankruptcy laws are written to protect companies and not investors, look at the latest massive filing by CIT Group.
The lender has debt of $64.9 billion with assets of $71 billion. On paper, those numbers do not appear to justify any protection. Yet CIT's prepackaged reorganization plan makes it the fifth largest Chapter 11 filing in U.S. corporate history. With all the players on board, CIT will emerge from bankruptcy by year's end and go back to making money.
The only losers are the owners of the company's common and preferred stock. Count the American taxpayer among those losers. After all, the government gave CIT $2.3 billion last year in an effort to help the company avoid bankruptcy. CIT gave the government (all of us) $2.3 billion worth of preferred stock in exchange.
And now it won't be worth one penny. It is yet another example of how the U.S. system privatizes profits and socializes losses.
How can the average American taxpayer manage such risk? Without responsible representation in elected offices, it's impossible. It is reprehensible for Congress to allow our money to be written off -- and allow the company to move forward making money for itself and other corporate partners.
We entrust elected officials to be good stewards of the ever-increasing tax dollars extracted from the pockets of individuals. It is not enough to limit the salaries of high-ranking corporate executives. U.S. taxpayers did not choose to involve themselves with CIT's internal failure. Yet the bankruptcy process will allow the company to renege on its obligation to each and every citizen.
This is not a free market in action. It is a corrupt process that should give capitalism a bad name.
We should be ashamed to be represented so poorly in the nation's capital.
Editorial by Patrick Lowry