Guidelines for Rescuing Large Failing Firms and Municipalities

GGD-84-34: Published: Mar 29, 1984. Publicly Released: Mar 29, 1984.

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GAO described the government's involvement and experience in four large-scale assistance programs and suggested guidelines for the design, implementation, and administration of any future program.

GAO has been involved in the Conrail, Lockheed, New York City, and Chrysler assistance programs. In both the Conrail and Chrysler cases, GAO had direct program involvement as a result of the Comptroller General's membership on boards responsible for administering the programs. In the Lockheed and New York City cases, GAO performed its traditional oversight role. GAO believes that, when the government is approached by a troubled firm or municipality, it must identify the problem as accurately and quickly as possible. If the problem is largely specific to the firm or municipality, Congress must decide whether the national interest will be served best through a legislative solution, or whether market forces and established legal procedures should proceed. In reaching this determination, Congress should take into account all costs of a corporate or municipal collapse and the disadvantages of providing aid. Once Congress decides that the benefits of a rescue exceed those of bankruptcy, the legislation should provide that congressional goals and objectives are clear, concise, and consistent. To protect its financial interest in assistance programs, the government should: (1) require others with a stake in the outcome to make concessions; (2) have the authority to approve an aid recipient's financial and operating plans and new major contracts; (3) require, where feasible, that the recipient maintain adequate collateral and that all other lenders subordinate their claims on this collateral to the government's claim; and (4) receive risk compensation.

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