by Michael Greaney

Created on: April 07, 2009

Can a company be "too big" to fail? That is the justification being given for letting the State take control of certain key industries in the United States, using taxpayer money to stave off bankruptcy.

There are a number of problems with the assumption that a company can be "too big" to fail, not the least of which is that, if the free market is operating, the market will itself determine the optimal size of any enterprise. If a company has managed to become "too big" to fail, the implication is that there has been some interference in the free market to the extent that market forces no longer operate.

The idea that the State should intervene in a company or industry to stave off bankruptcy also suggests that the free market has already been set aside. The State has remedies embodied in its laws for companies that should not be allowed to fail. The chief of these is a Chapter 11 reorganization. Chapter 11 reorganization recognizes that there is the possibility that a company can be restructured in a way that will make it once again a viable business enterprise. The idea is to eliminate everything that is holding the company back, and allow it to continue with all its strengths if any intact. Those who made poor investment or management decisions suffer the consequent losses or are eliminated and replaced with others more likely to get things back on a stable footing.

If a Chapter 11 reorganization isn't feasible, there is always a Chapter 7 bankruptcy. A bankruptcy is an acknowledgement that there is no life left in the company. For current owners or, worse, the State to start pouring money into the company to stave off bankruptcy is counterproductive in the extreme, to say nothing, in the latter instance, of being tantamount to socialism. If all the company needed was a reorganization and restructuring of its debt and equity to become viable, it should have gone through a Chapter 11 reorganization. Otherwise, it is a waste of money to keep everything as it was and throw good money after bad to avoid a Chapter 7 bankruptcy. In neither case is there a role for the State other than to provide and maintain a court system in which reorganizations and bankruptcies can be adjudicated.

One possibility that doesn't seem to be occurring to people in the current administration or on Wall Street is for the Big Three automakers and other companies in trouble to go through a Chapter 11 reorganization. The old equity and much of the existing debt can be wiped out, as is common

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