Theft and Thuggery: the Auto Bailout Revisited — 6 August 2012

A correspondent recently said to me, in defense of President Obama’s economic record, “Last I looked, Detroit was doing very well!”  Indeed, just tonight an Ohio-based commentator said Obama is doing pretty well in her state because of the success of the auto bailouts.  As Joe Biden famously formulated it, “GM is alive, and bin Laden is dead!”  The White House is heavily pushing the bailout experience as an economic triumph – with no small help from a friendly media.

There is an alternative view: one of a bullying administration that threw billions in taxpayer money at a favored constituency, trampling along the way on the rights of workers, retirees, investors, and incidentally the rule of law.  It was great for the UAW, but for few others.

Let’s start with what happens in a bankruptcy.  Contrary to what many think, bankruptcy does not mean the closure of the company, factories shuttered, workers on the breadline.  Look at American Airlines, which entered Chapter 11 last November.  They continue to fly.  Indeed, just about every large US air carrier has declared bankruptcy over the years, and the country still has a vigorous air travel industry.

Companies are not dissolved in bankruptcy, especially not those who, like GM, have billions in machinery, factories, patents, design property, people, distribution networks, customer loyalty, and other assets.  Rather, bankruptcy is designed to give companies in distress breathing room while they reorder their financial affairs.  This usually means reducing labor costs to be more competitive.

But that didn’t happen with GM.  They did manage to trim a few of their most egregious contract terms, such as the notorious JOBS bank, which paid people to do nothing.  But they still have the highest hourly labor costs in the business, at $57 per hour, far higher than, say, the import companies who built their plants in the non-union South.

In fact, compared to a normal bankruptcy, the UAW came out of this one smelling like a rose.  As analysts James Sherk and Todd Zywicki detail in an extensive report for the Heritage Foundation, the union, as an unsecured creditor of GM (because the company owed billions to the union-managed benefits fund) should have received $5.6 billion in cash, stock and warrants, if they were paid fairly with the rest of the company’s creditors. Instead, their payout was worth three times as much, $17.8 billion.

Over at Chrysler, the UAW got even more favorable treatment.  Chrysler’s creditors were mostly secured – meaning there were specific assets pledged against those debts to make sure those creditors got paid.  This was because with Chrysler’s dodgy financial history, nobody would lend to them without taking collateral for the loans.  What the Obama Administration did in that instance was push the UAW claims ahead of the secured lenders.

Whereas the first secured lenders received 30% on the dollar, and the second secured lenders were wiped out, the UAW, whose unsecured claims ranked behind either of the first two, received 55% of the new Chrysler, plus a note for $4.6 billion that paid 9% interest.  In all, these gifts totaled more than $9 billion – and they should have received nothing until both sets of secured lenders were paid in full.

The Chrysler creditors did not all take this lying down.  A group of them sued the government against their mistreatment, and the White House denounced them as fat cats trying to derail the rescue of the auto industry.  In fact, the lead plaintiff for one of the suits was the Indiana State Police Pension Trust – Obama screwed the first responders to favor the UAW.  The lawsuit was rejected by the court, largely because most of the creditors succumbed to administration pressure to give up their legal rights.  Even though the Supreme Court later vacated that ruling, it was too late; their money was gone.

Another case of favoring the UAW occurred at Delphi.  This auto parts maker, spun off from GM, entered bankruptcy at about the same time.  The company’s pension obligations were handed over to the federal rescue agency, the Pension Benefit Guaranty Trust, which promptly (as is typically the case), slashed the scheduled payouts.  GM, using taxpayer money from the bailout, forwarded a cool $1 billion to top up the pensions of the UAW workers – but not a dime went to the pensions of the company’s white collar employees, or even those of other unions, such as the International Union of Electrical Workers (IUE).  GM was not obligated to make any payments, but somehow an act of grace sent a billion dollars of your money and mine to help out the UAW.

The list goes on.  Sherk and Zywicki reckon that the full cost of the $30 billion that went up in smoke in this bailout went not to keep the companies themselves in business but to overpay the UAW.  Factor out the handouts to that union and you have the taxpayer breaking even.

In other words, the auto companies could have done what Mitt Romney has said – gone through a normal bankruptcy process, which would have been orderly, would have respected the priority of claims of the various creditors, and would have resulted in companies that had restructured their cost bases to be competitive in a very difficult world.  They could have done all that without the taxpayer pouring $30 billion down a black hole.  It’s what American Airlines is doing.

As it is, GM, which claims to have had its best year ever, is not fooling investors.  At a time when the US stock market in general is at its highest level since the start of the recession, GM shares are trading at a five-year low.  At this rate, the US government, which owns 33% of the company, will be facing an even greater loss on its “investment.”

There are those who may say that, despite the costs, the bailout was worth it, because it put money in the hands of auto workers, and thus helped keep the economy afloat.  But that’s a foolish argument.  The money that went into those hands was taken from other hands, and those people now can’t spend it.  Net, net, there is no new money there, and no new spending.

Beyond that, there is the damage to the financing of our economy done by the trampling of the administration on property rights, the legal claims of secured lenders, and the justice of deserving and receiving fair treatment.

But what I really object to is that my tax dollars are going undeservedly into the paychecks of union members, from which 5% or so is automatically deducted as dues to pay for lobbying for union causes – that is, Democratic politicians.  Indeed, 96% of the union’s contributions over the last 20 years has been to Democrats.

President Obama claims to prize fairness above nearly all else.  But in the case of the auto bailouts, he chose to favor one special interest, the UAW, over the taxpayers, the senior creditors, the non-union workers, the first responders, the investors, and even other union members.  It was a case of highway robbery in broad daylight.  And he brags about it.

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