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Bailouts v Bankruptcy

Summary:
Bailouts are back. It's all 2008 all over again.Bankruptcy of a large corporation does not leave a crater behind. Bankruptcy is reorganization and protection, not liquidation. The point of bankruptcy is precisely to keep the business going. When a corporation files for bankruptcy, the stockholders are wiped out, bondholders lose a lot and become the ...

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Bailouts are back. It's all 2008 all over again.

Bankruptcy of a large corporation does not leave a crater behind. Bankruptcy is reorganization and protection, not liquidation. The point of bankruptcy is precisely to keep the business going. When a corporation files for bankruptcy, the stockholders are wiped out, bondholders lose a lot and become the new stockholders. The company rewrites a lot of contracts -- union contracts requiring a plane to fly even with empty seats, contracts to buy fuel at high prices, gate leases, and so forth.

Bailouts are bailouts to stockholders, bondholders, creditors, unions. The first three all basically signed up to write insurance, and got a fee for doing so. Bailouts are not bailouts to "the corporation" which isn't a thing.  Maybe maybe there was a case in 2008 that big banks were "systemic" and their creditors could not take the losses that they had signed up to take. Not so industrial companies.

Airlines and similar companies are in this mess because they took on way too much debt. If the government does bail out their stockholders and creditors, it makes a lot of sense not to let them take on  so much debt again. Repurchases per se are not the villain, as companies can borrow and pay big dividends. We might also start by finally, finally, removing the huge subsidies to debt.

If you're not persuaded, Veronique de Rugy and Gary Leff have an excellent and exhaustive article on this The Case Against Bailing out the Airline Industry. 
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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