Did Bush Save General Motors? Obama Messed Up Chrysler

by Hans Bader on November 2, 2012 · 3 comments

in Bailout Watch, Economy

If you accept the dubious logic the federal government “saved” the auto industry (which requires ignoring other things that rescued General Motors, such as the Japanese earthquake and tsunami, and Thai floods, that battered its Japanese competitors, and ignores how government red tape weighs down the auto industry), then you have to give the credit primarily to President George W. Bush, not President Obama.

PolitiFact leaves out Bush, and refers to the bailouts as Obama’s “rescue of the auto industry,” in a flawed recent “fact-check” of a claim that is literally true but arguably misleading (the claim that “Obama took GM and Chrysler into bankruptcy and sold Chrysler to Italians who are going to build Jeeps in China”). It’s just the latest faulty pronouncement from a “fact-checker” that falsely claimed a costly energy-rationing scheme wouldn’t raise energy prices, and got the basic facts of a Supreme Court decision wrong.

PolitiFact says the claim about Chrysler building Jeeps in China creates the “impression that Jeeps built in China come at the expense of American workers,” and thus is false, although the claim does not literally say that. PolitiFact does not address related news that Fiat, which bought Chrysler, is now planning to produce some Jeeps in Italy, rather than in the United States. As the Detroit Free Press reported, Fiat plans to “export new . . . Jeep models from Italy to prevent plants from closing, protect Italian jobs and reduce Fiat’s dependence on Chrysler’s profits in the U.S. . . . by exporting premium brands from Italy to the U.S.”

As John Berlau and Mark Beatty note in The Daily Caller, “The real outrage arising from the 2009 Chrysler bailout is not that its parent company, Fiat, is planning to build plants in China. It’s that the politicized bankruptcy process limited Chrysler’s growth potential by tying it to an Italian dinosaur in the midst of the European fiscal crisis. The Obama administration literally gave away ownership of one of the Big Three American auto manufacturers to an Italian car maker struggling with labor and productivity issues worse than those that drove Chrysler to near-liquidation. As a result, much of Chrysler’s profits from its overhauled line are going to prop up Fiat’s failing, money-losing Italian business, rather than to expanding production and jobs in the U.S. Moody’s had downgraded Fiat’s credit rating to “junk” even before the Obama administration arranged for it to acquire a Chrysler stake, and last month Moody’s gave Fiat another downgrade that the Financial Times described as even “further into ‘junk’ territory.” Since Fiat has to keep paying idle Italian auto workers under Italy’s perverse labor laws, it has an incentive to shift production from America to Italy even if American auto workers are more productive than Italians.

PolitiFact’s describing the auto bailouts as Obama’s rescue of the auto industry was strange, because PolitiFact earlier argued that “Bush’s aid to Chrysler and GM kept them afloat,” and that “credit markets” were “frozen” in December 2008 — when Bush, not Obama, extended loans to General Motors and Chrysler. The Obama administration only gave them money later, when credit markets were not frozen, and government financing thus should not have been necessary. Obama himself noted that it was the Bush administration that first provided financing, accusing Bush of “giving (auto companies) billions of dollars and just asking nothing in return,” a claim fact-checkers rated false because Bush’s loans were subject to a variety of conditions, such as a “50 percent reduction in payments to health care funds for UAW retirees.” As PolitiFact elsewhere conceded, “The auto rescue began under President George W. Bush, who just before leaving office gave Chrysler and GM more than $17 billion in loans. (Ford never asked for assistance.) Then in 2009, Obama provided $80 billion.”

Romney also was not a free-market purist when it came to the auto industry: “The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk,” he wrote. This is a much more limited (and less costly) form of federal assistance to the auto industry than Obama implemented, but it is federal assistance nonetheless. (General Motors ultimately did go bankrupt despite all the billions it received in federal bailout money, but it emerged from bankruptcy, as big manufacturers often do. If markets exist for a company’s products, its factories will keep running regardless of whether the company itself goes bankrupt, since the factories produce revenue and thus will be sold to new management if need be to pay off as much of the company’s debts as possible.)

Law professor Todd Zywicki and Heritage Foundation labor analyst James Sherk note the taxpayer money lost in the bailouts largely resulted from the Obama administration using the bailouts to subsidize the UAW union, rather than strengthen the company. The UAW, not the company, was the beneficiary of the Obama administration’s additional billions in bailout money. (Benefit funds controlled by the UAW ended up with a substantial chunk of the company they would not ordinarily have received in a bankruptcy. GM also ended up with a “debt of $2.5 billion to the UAW as well as issuing them $6.5 billion of preferred stock which will pay almost $600 million annually.”) If the Obama administration had not given that additional money to the automakers, General Motors’ factories still would have kept running, but the UAW and its benefit funds would have received little or nothing, since it ranked behind secured creditors in the bankruptcy process. But the Obama administration politicized the GM and Chrysler bankruptcies in order to fleece the companies’ secured creditors, and bondholders, thus discouraging investors from investing in the auto industry in the future (which means lower job creation in the future), as fund managers and Warren Buffett have warned.

Moreover, PolitiFact simply ignores the fact that natural disasters like the Japanese earthquake and Tsunami and the Thai floods (which shut down car-parts factories in Thailand, disrupting the supply chain for Japanese cars), did far more to revive General Motors than Obama ever did, by hammering GM’s Japanese competitors. As these disasters have receded, the Japanese automakers have regained market share, and Toyota once again became the world’s biggest automaker. Toyota’s sales of light vehicles rose 16 percent in October, compared to just 4.7 percent for GM.

It also ignores the damage done by the Obama administration to GM’s management. The Obama administration forced out a pre-bailout CEO, Rick Wagoner, who had put in place changes that belatedly resulted in improved product lines coming out shortly after his ouster, replacing him with worse management. Auto industry experts are horrified by GM’s recent mismanagement of its European operations:

General Motors’ plan to displace the venerable and respected Opel brand in Europe with a new Chevrolet “global” brand really is as insane as it seems, according to Keith Crain of Automotive News. “It will take decades for Chevrolet to establish anywhere near the recognition that Opel has,” Crain argues.

GM now is seeking to stave off losses in market share by financing auto sales with risky loans that may never be paid back, resulting in GM’s increasing reliance on selling cars to people who can’t pay for them: “GM Ramps Up Risky Subprime Auto Loans To Drive Sales,” noted Investor’s Business Daily. “The automaker is relying increasingly on subprime loans . . . GM Financial auto loans to customers with FICO scores below 660 rose . . . to 93 percent in Q1 2012.” GM’s current CEO has also fired or driven away valuable employees in what looks like scapegoating for his own bad decisions.

The role of the Thai floods and the Japanese earthquake in harming Japanese automakers, and thus propping up General Motors, can be seen in news stories like these:

  1. Toyota making drastic production cuts after Japan quake, tsunami ..

  2. Toyota, Honda, Nissan Plants Shut Down After Earthquake And Tsunami..

Hans Bader November 2, 2012 at 10:57 pm

Earlier, I discussed how GM’s recovery was inflated because of the hangover effect of Toyota’s safety recalls.

GM benefited from the bogus safety issues and resulting recalls that bedeviled Toyota in 2010. This helped GM temporarily gain market share at a time when overall auto sales were rising rapidly. For example, as The New York Times noted in March 2010, “Toyota Motor, estimating that it lost 18,000 sales in the United States last month while its chief competitors enjoyed big gains, introduced incentives Tuesday as it tried to restore consumers’ confidence in its vehicles after three big recalls,” as the company “acknowledged that the recalls had hurt Toyota’s ability to attract new buyers.” Toyota sales later rebounded, however, after it turned out its vehicles were safe, and that crashes of Toyota vehicles were the result of driver error, except for one crash that resulted from a dealer improperly installing a floor mat.

I discussed the subject within this commentary:


Lawyer Ted Frank has discussed the issue here, chronicling how Toyota vehicles turned out to be safe:


The Cato Institute discusses it here:

Hans Bader November 3, 2012 at 1:47 pm

Experts on the auto industry have observed that the Obama Administration abused the bankruptcy process after General Motors filed for bankruptcy to rip off taxpayers to the tune of billions of dollars, and preserve costly union privileges that will harm General Motors’ long run viability. One expert argues in the Wall Street Journal that this has resulted in much higher costs to taxpayers, and poorer prospects for GM, than if Romney’s cheaper plan for aiding the auto industry had been followed.

Edward Niedermeyer, the former editor of The Truth About Cars, argues in the Wall Street Journal (“Romney’s Plan Would Also Have ‘Saved’ Detroit,” Nov. 3) that:

“Making matters worse, the [Obama] Treasury Department issued notices which let ‘New GM’ acquire $45 billion in tax write-offs from its defunct predecessor, a blatant violation of basic bankruptcy law. This not only deprived the government of billions in tax revenue, it hid the true cost of the bailout while disproportionally benefiting the UAW, an unsecured creditor.

“By giving the UAW’s unsecured claims against GM and Chrysler a higher priority than those of secured creditors, the government’s reorganization further damaged bankruptcy precedent. The net result was a $26 billion transfer to a key Democratic ally and political donor, according to analysis by scholars from the Heritage Foundation and George Mason University.

“GM and Chrysler could have averted tens of thousands of lost jobs, and the government could have preserved billions of dollars in tax revenue, by undergoing a true bankruptcy reorganization, even if the government had provided full debtor-in-possession financing.

“In a true bankruptcy guided by the law rather than by a sympathetic, rule-bending political task force, GM and Chrysler would have more fully faced their competitive challenges, enjoyed more leverage to secure union concessions, and had the chance to divest money-losing operations like GM’s moribund Opel unit. True bankruptcy would have lessened the chance that GM and Chrysler will stumble again, a very real possibility in the brutally competitive auto industry.

“Certainly President Obama threw enough money at GM and Chrysler to create a short-term turnaround, but if the auto makers find themselves on hard times and return to Washington with hats in hand, his policy will have been no rescue at all.”

His column is available at this link:


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