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The Unknown Costs of Saving the Auto Industry

Posted by Larry Doyle on June 6, 2011 7:41 AM |

This past Friday’s unemployment report was beyond disappointing. With non-farm payrolls increasing by a token 54,000 and the prior month’s report indicating a downward revision of 12,000 our ‘walking pneumonia’ economy continues to languish under the weight of excessive debts and grave uncertainties. What is an administration to do when faced with such a challenge? Spin, baby, spin.

Where do I witness this spin cycle working in overdrive? The Obama administration’s touting of success in saving our automotive industry. There is little doubt that the Obama team will be ‘driving’ this ‘saving’ of the automotive industry hard as part of his 2012 reelection platform. 

Obama is entitled to deliver whatever message he may care to gain reelection but the American public is equally entitled to know the lengths and costs to which the administration went on this front. Trampling of capitalism and the Constitution, perhaps? Twisting of arms like never before? Playing hardball politics with basic market principles in an unprecedented fashion? Yes, yes, yes.

If we were to listen to the Obama team define the situation, we would not be making any autos in our nation if not for his efforts. Wow. Is that right? Talk about chutzpah. The fact of the matter is the ‘saving ‘ of the auto industry was nothing short of a massive trampling of basic rules of bankruptcy with the administration picking the winners and losers in the process. If you think that these abuses do not come with real long term costs then let’s open up the dictionary and review the definition of ‘naive’.

David Skeel, professor of law at the University of Pensylvania, writes in today’s Wall Street Journal about The Real Costs of the Auto Bailout,

President Obama’s visit to a Chrysler plant in Toledo, Ohio, on Friday was the culmination of a campaign to portray the auto bailouts as a brilliant success with no unpleasant side effects. “The industry is back on its feet,” the president said, “repaying its debt, gaining ground.”

If the government hadn’t stepped in and dictated the terms of the restructuring, the story goes, General Motors and Chrysler would have collapsed, and at least a million jobs would have been lost. The bailouts averted disaster, and they did so at remarkably little cost.

The problem with this happy story is that neither of its parts is accurate. Commandeering the bankruptcy process was not, as apologists for the bailouts claim, the only hope for GM and Chrysler. And the long-term costs of the bailouts will be enormous.

No unpleasant side effects? What planet is he on? Remarkably little cost? Get serious.

The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM’s success in selling a significant amount of stock, reducing the government’s stake, and Chrysler’s repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn’t mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.

But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it’s sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers’ pockets.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

Why will lenders be very hesitant to extend credit under these conditions? Well, let’s revisit just how creditors were treated by the Obama administration in the midst of the Chrysler restructuring. I highlighted this treatment on May 2, 2009 when I wrote, Is Barack Obama Going Tony Soprano?

“One of my clients was directly threatened by the White House.”

That’s a quote, folks, from a lawyer representing firms which lent Chrysler money on behalf of their clients, including pension funds, teachers, labor unions, college endowments, et al.

Threatening creditors may be common practice in the underworld. In the world of business and politics, commonly accepted rules of law, business practices and ethics are widely accepted and adjudicated by the courts to prevent abuse. Did the White House just abuse the Constitution in the process of engaging Chrysler’s non-TARP creditors? Tom Lauria, an attorney with White & Case representing a few non-TARP Chrysler creditors, believes the White House did exactly that.

I strongly recommend that you listen to the audio recording of Frank Beckmann’s interview with Tom Lauria.

Obama and team are certainly entitled to their own opinions but the fact of the matter is the costs of bailing out not only the automotive industry but also Wall Street are far greater than we may ever know.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

 

  • Johnnie

    Do not forget that Obama’s own Inspector General determined that which car dealerships were selected to remain open was not exactly a random event.

    Race Played Role in Obama Car Dealer Closures

    The Obama administration, already under fire for unprecedented allegations of racial bias, faces a new bias claim from a most unlikely source: one of the administration’s own inspectors general.

    Decisions on which car dealerships to close as part of the auto industry bailout — closures the Obama administration forced on General Motors and Chrysler — were based in part on race and gender, according to a report by Troubled Asset Relief Program Special Inspector General Neal M. Barofsky.

    [D]ealerships were retained because they were recently appointed, were key wholesale parts dealers, or were minority- or woman-owned dealerships. [Emphasis added.]

    Thus, to meet numbers forced on them by the Obama administration, General Motors and Chrysler were forced to shutter other, potentially more viable, dealerships. The livelihood of potentially tens of thousands of families was thus eliminated simply because their dealerships were not minority- or woman-owned.

    As has been widely reported, the Inspector General’s study skewered the Obama Gang for strong-arming the companies into closing 2,000 dealerships, costing an estimated 100,000 people their jobs during a recession.

    But the news media has ignored key elements of Barofsky’s report — elements that are far more damaging, if possible, to Obama. As we reported earlier in the week, a top Obama official, manufacturing czar and “Auto Team” leader Ron Bloom admitted that the dealerships could have been kept open, saving those jobs, “but that doing so would have been inconsistent with the President’s mandate for ‘shared sacrifice.'”

  • Joseph

    Remarkably little cost? Spending other people’s money and violating their credit positions may not be significant to a President and administration looking to take care of their union buddies but is America’s memory so short that it would not remember what really happened?

    Thanks for the radio clip. That was fabulous.

  • Pinocchio

    The Washington Post provides a scathing rebuke of assertions made by Barack on this topic,

    President Obama’s Phony Accounting on the Auto Industry Bailout

    WaPo writes,

    We take no view on whether the administration’s efforts on behalf of the automobile industry were a good or bad thing; that’s a matter for the editorial pages and eventually the historians. But we are interested in the facts the president cited to make his case.

    What we found is one of the most misleading collections of assertions we have seen in a short presidential speech. Virtually every claim by the president regarding the auto industry needs an asterisk, just like the fine print in that too-good-to-be-true car loan.






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