The Unintended Consequences of Good Intentions

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8 Responses

  1. “Other than the fact that the U.S. government owns part of these companies, is there anything that distinguishes the economic harm suffered by the dealers from that suffered by every other claimant in these and other chapter 11 cases?”

    Well that’s a pretty big difference. Had it gone through a normal bankruptcy process, creditors et al would have had a true day in court and perhaps the taint of politics wouldn’t have so appropriately attached to the results. Instead, this administration was able to ram-rod these bankruptcies through. So, with the ship of executive interference having already sailed then, I hardly find it separately objectionable that the legislature also wants to prove how little it knows about running an auto business.

    Any wounds to the federal bankruptcy system this process inflicts are self-inflicted; they shoulda, coulda told the WH to butt out…but I guess they too were still basking in the glow of change we could believe in.

  2. Michelle Harner says:

    Thank you for the comment. You are right that the government’s intervention raises unique issues in these cases. (For an interesting and broader review of the government’s role in business during the crisis, see a recent paper by J.W. Verret titled, “Treasury, Inc.”, available at And that intervention is a key concern underlying the questions I raise. That being said, I am not sure the government’s presence influenced the company’s decision to close dealerships or the court’s approval of that decision. Corporate debtors typically receive substantial deference with respect to their contract treatment decisions.

  3. Garrett Wollman says:

    *Public* outrage? I’ve heard precious little of that. The only outrage I’ve heard about this has come from the people who benefit from long-term relationships with these dealers: sellers of advertising space/time (newspapers, radio and TV stations), and of influence (politicians).

  4. Michelle Harner says:


    Thank you for the comment. I think you identify two of the key voices in this debate, but I also think there are others. For example, the dealers themselves have been very vocal. They have used the media and the court itself, filing almost 200 responses to Chrylser’s motion to reject certain dealership agreements. And I think there has been a lot of public support generated for these dealers in their home jurisdictions. If the concern was solely the loss of advertising space, presumably states would not be proposing legislation to block Chrysler and GM from granting new franchises in their jurisdictions. That being said, I suspect that you are right that it has played some role. In any event, my reference to “public outrage” really was focused on the dealers and their supporters who have circulated petitions and otherwise been very active in this process.

    Best regards, Michelle.

  5. Confused 2(now 3)L says:

    I think its important to realize that in many states dealer franchisee agreements already exist in a highly regulated and primarily dealer favorable environment in almost all states. Manufacturers are prohibited from selling directly to market, dealers are granted exclusive territories, once granted manufactures were prevented or severely limited from terminating and restructuring agreements. The degree of the closings are largely attributable to the fact that manufacturers were incapable from pruning their dealer networks over the last few decades.

    The reasoning behind the favorable treatment of dealers is the outsize role car dealerships have generally played in local life and especially in local politics. As a class, dealers have always been generous contributors to candidates for state government and the House. This explains why all the complaints so far have originated in the House, and from both sides of the aisle, while very few senators have weighed in on the issue.

  6. Michelle Harner says:

    Thank you for the comment and insights. I particularly like your points regarding state law protections for dealers and the difficulties of pruning dealership agreements. I seem to recall that GM paid a large sum of money to buy out its Oldsmobile dealership agreements in the early 2000s.

  7. I agree the government presence was probably not wholly dispositive as to dealer de-selection but this administration’s presence surely added an appearance of impropriety.

    As an exercise, mentally rank union workers, union retirees, non-union retirees, bondholders and auto dealers in order of who did best under the bankruptcy; now rank by where you think they fit in the Obama coalition. Any changes? If you didn’t trust the government going into the process, nothing about it gives you any reason to rethink your suspicions.

  8. Michelle Harner says:

    I understand your point. Interestingly, in cases not involving the government, we are seeing similar influence exercised by senior lenders and what I like to call activist distressed debt investors. These parties of course lack regulatory control over the debtors, but they are finding ways to dictate the outcome of chapter 11 cases. I am going to discuss the issue of increasing creditor control in a future post. Thanks again for the comment.