auto bailout

General Motors raised more than $20 billion in an initial public offering (IPO) this week, selling millions of shares owned by the federal government, and reducing the government’s ownership of GM from 61 percent to 33 percent.

GM stock is worth money partly because its government ownership stake allows it to claim up to $45 billion in tax savings that it would otherwise have had to forfeit as a result of its bankruptcy. GM is also receiving lots of taxpayer subsidies for its Chevy Volt, despite recent revelations that it lied about that car, which it was trumpeting in a “publicity stunt” to curry favor with politicians crusading against global warming.

GM still owes taxpayers at least $29.4 billion, and its finance arm owes taxpayers an additional $14.6 billion. In a sense, taxpayers lost money on the sale. (They got at least $9 billion less for the stock that was sold in last week’s IPO than they originally paid for that stock.)

Slate’s Mickey Kaus, who reluctantly supported the auto bailouts, thinks that people who bought GM stock were “suckers,” since GM faces hidden perils, still has too much red tape and inefficiency, lacks “effective internal controls,” and is the beneficiary of accounting gimmicks and unrealistic assumptions about its future market share.

John Berlau, who studies financial markets at CEI, had a much more grim assessment of the GM bailout and its IPO.

Earlier, GM lied about whether it had paid back taxpayers for its bailout, triggering an FTC complaint by CEI.

Image credit: hanneorla’s flickr photostream.

President Obama’s tax-cheat treasury secretary, Tim Geithner, is trumpeting the fact that General Motors has paid back a small fraction of what taxpayers gave the company, noting that “GM had repaid in full the $4.7 billion balance it owed under the government’s Trouble Asset Relief Program.” But this so-called “repayment” was just an accounting trick.  GM used government bailout money to make the “repayment,” as the New York Times has noted.

More importantly, this “repayment” is a drop in the bucket compared to what GM has received from taxpayers.  The federal government has yet to recover the lion’s share of the more than $50 billion it loaned the company.  Why?  Because that $50 billion was mostly “converted into stock held by the Treasury Department.”  That’s billions of dollars for stock in a company that, for all intents and purposes, was bankrupt. (GM just lost another $4.3 billion.)

The only reason GM had enough money left to pay back any of what it owes taxpayers is because of Toyota’s recent safety issues and recalls, which drove car buyers away from Toyota to GM and Ford.  Only that kept GM from burning through most of the taxpayers’ money.

Even though GM still hasn’t paid back the $50 billion, and received billions in additional handouts through programs like the incredibly wasteful Cash for Clunkers (which cost taxpayers and used-car and car-parts businesses billions), Obama backers now claim that critics of the bailout owe Obama, GM, and the UAW “an apology.”

Ironically, GM would never have needed a bailout if it had just received relief from costly regulations such as CAFE rules (which wiped out at least 50,000 jobs) and dealer-franchise laws.  That’s so despite GM’s massive burdens from excessive union wages and benefits (worth up to $70 an hour), and rigid union work rules.

The Obama Administration left those wasteful work rules and excessive benefits largely intact, and gave the United Auto Workers Union (UAW) a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company, and the company has value today only because the federal government pumped billions of taxpayer dollars into the company (and engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company).

Veteran political commentator Michael Barone called the Obama administration’s treatment of Chrysler and GM bondholders “gangster government.” Law professor and bankruptcy expert Todd Zywicki called it an attack on “the rule of law.”

Back in 2008, Zywicki prophetically warned that a bailout would prove worse for the auto industry than for automakers to just quickly file for bankruptcy.   Zywicki noted that by enabling automakers to get rid of expensive union contracts and red tape, a “Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.”   It would provide  “a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules.”  It would also help automakers get rid of redundant auto dealerships that should be terminated but aren’t because of state dealer franchise laws.  Nobel Prize winning economist Gary Becker also argued that bankruptcy would have been better than a bailout in achieving “needed reforms.”

But the federal government ignored their wise advice, and chose to embark an incredibly costly bailout instead.   The bailout of GM and Chrysler is similar in many ways to the British government’s unsuccessful auto bailout in the 1970s, which ultimately failed despite a cost in the billions.

The federal government used money from the $700 billion bank bailout for the auto industry bailout. Legal scholars at the Heritage Foundation, Clinton administration Labor Secretary Robert Reich and many other commentators have argued that using the bank-bailout money for auto bailouts was illegal.

In a preview to the 2010 census, Michigan learned this week that it was one of only three states to lose members of its population. Of course, since the state has seen a steady decline in population over the past four years this doesn’t exactly come as a shock.

Michigan lost 32,759 people between July 1, 2008, and July 1, 2009, a decline of 0.3%, while the nation’s population grew 0.9% to 307,006,550. Maine and Rhode Island also lost population.

By the end of the decade researchers estimate that Michigan will have lost 20% of its jobs. And the situation isn’t likely to improve. Michigan politicians continue to demonstrate their lack of understanding about how markets work and why jobs and thus residents are exiting the state for friendlier lands. It isn’t a lack of government funding but rather a glut of government intervention that is driving competition, business, jobs, and residents to other states. For example, as I have written about in the past, Michigan’s solution to the high cost of car insurance in the state is not to examine and solve the mechanisms that drive up the cost of writing insurance in the state, but rather to mandate companies simply charge less and take less of a profit. This ignores the fact that insurers in Michigan are making smaller profits than other states and more controls simply add incentive for insurance companies to leave the state, taking jobs and access to insurance with them.

Detractors of capitalism decry that it caters to special interests. The opposite is actually true. Just look at what’s happened in the last year.

Most of Wall Street came to government asking for a bailout when the government-created housing bubble popped.

The Big Three automakers also went to Washington for largesse when their customers came to prefer Toyotas and Hondas.

Health insurance companies stand to make a killing if Obamacare passes.

T. Boone Pickens and Al Gore would make millions from environmental legislation.

Ludwig von Mises explained the reason for all of this corrupt behavior with a single sentence back in 1949: “It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference.”
-Human Action, 4th Edition, p. 337.

As Frederic Bastiat succinctly noted long ago, when determining the effects of a specific action, it is necessary to consider not only “what is seen” — the observed effects of that action — but also “what is not seen” — opportunities forsaken for the chosen course of action. In public policy, this means that it is necessary to look not only at the alleged benefits of a specific policy after it’s enacted, but also at what would have happened if that policy had never been enacted.

Viewed in this light, the Cash for Clunkers program is a costly boondoggle that will yield little net benefit. The car buying site Edmunds.com compared car sales under Cash for Clunkers with typical car sales over a similar period as that of the program’s existence, and found a net increase of only 50,000 cars — at a cost of $20,000 each.

How is this possible? Edmunds.com’s research shows that typically 200,000 vehicles worth less than $4,500 are traded in for new vehicles every three months. At best the current Cash for Clunkers program will fund 250,000 such transactions in the same time period — a gain of only 50,000 vehicles. Given that this program is budgeted to cost $1,000,000,000, this increase will come at the cost of $20,000 per extra sale.

But it may get worse yet. With so many car buyers taking advantage of what many perceive as “free” government cash, the Cash for Clunkers program is nearly out of money. Naturally, politicians who supported the program take this as a sign of success, and therefore now want more money for the program. They’re likely to get it.

Worse, the Edmunds estimate is actually conservative, which means that costs could go even higher. As Avery Goodman of the business site Seeking Alpha notes:

The highest rebate is $4,500, and the lowest is $3,500. If everyone qualified for $4,500 per vehicle, about 222,000 vehicles would have just taken advantage of the government’s money. At $3,500, 286,000 vehicles will have been sold.

I assume that, given all the raving, the government will eventually get around to assigning more money. It will take at least 2 or 3 months for the legislation to work its way through Congress. Meanwhile, if all buyers have qualified for the higher $4,500 rebate, the “cash for clunkers” program will mean a marginal increase in car sales of 22,000 this quarter. $1 billion divided by 22,000 means a net cost to the government of $45,354 per car.

If all buyers only qualify for the $3,500 rebate, it means a marginal increase in sales of about 86,000, or a net cost to the taxpayers of $11,628 per vehicle. In all likelihood, however, there will probably be a mix of vehicles qualifying for various rebates between $3,500 and $4,500. Based upon that assumption, Edmunds.com estimates that the average cost to the taxpayer will be about $20,000 per vehicle.

Thus, two important things are not seen by Cash for Clunkers advocates — the fact that most of these car sales would have occurred anyway and  the business investment taxed way to pay for this wreck. (Thanks to Margaret Griffis for the tip.)

The federal government is spending more than $50 billion to bail out General Motors, with no end in sight. But the UAW union refused to sacrifice its privileged position to save the company, demanding excessive wages and benefits that are much higher than most Americans get. The Obama Administration caved in to its demands, saddling GM with high labor costs that may doom the company in the long run.

As the Washington Post notes today, the “concessions” that Obama obtained from the UAW were merely cosmetic: “Union concessions were ‘painful’ only by the peculiar standards of Big Three labor relations: At a time when some American workers are facing stiff pay cuts, UAW workers gave up their customary paid holiday on Easter Monday and their right to overtime pay after less than 40 hours per week. They still get health benefits that are far better than those received by many American families upon whose tax money GM jobs now depend. Ditto for UAW hourly wages . . . . Cumbersome UAW work rules have only been tweaked.” Earlier, the Post lamented the “preferential treatment of the autoworkers’ union at the expense” of other company stakeholders and creditors, noting that “the union can boast that it has been promised no loss in ‘base hourly pay, no reduction in . . . health care, and no reduction in pensions,’” even though excessive union wages and benefits helped sink the company. Small wonder that even the liberal Post, which backed Obama’s bailout of GM in March, now has soured on it.

If GM had rejected a federal bailout, and filed for bankruptcy in December, it would be recovering right now, since it could have used bankruptcy proceedings to tear up the collective bargaining agreements with the United Auto Workers that saddle it with excessive wages and benefits and rigid work rules, and it would also be benefiting from the fall in gas prices from $4 last year to $2.50 now. By avoiding a federal takeover, it would also have greater freedom to oppose costly regulations proposed by the Obama Administration, such as CAFE and global warming regulations, which will destroy tens of thousands of autoworker jobs).

The bailout is neither necessary nor likely to be successful in the long run. In its auto bailout in the 1970s, England did the same things that Obama is doing now, like propping up high union wages and promoting the production of little “green” cars consumers may not want. Its bailout failed miserably, destroying the British auto industry’s chance of survival.

Even more wasteful than the GM bailout is Obama’s wasteful $800 billion stimulus package, which has destroyed tens of thousands of jobs.

Even as it engages in costly, unauthorized auto bailouts that have no legal basis, the Administration is abdicating core federal responsibilities like enforcing the voting-rights laws. Political appointees in the Obama Justice Department recently blocked action against a racist, anti-semitic hate group (whose members included an Obama poll-watcher and city democratic official) that used nightsticks and racial epithets to drive white voters away from a polling place in Philadelphia last year. The Obama Justice Department has also rubberstamped unconstitutional legislation, failed to protect the voting rights of American servicemen, and been deafeningly silent about a liberal black political boss in Mississippi who prevented voters from casting ballots and engaged in vote fraud.

So reads the Washington Examiner’s editorial today about how Obama effectively gave ownership of Chrysler to the United Auto Workers Union (which spent millions electing Obama), rather than taxpayers (who have spent billions to bail out Chrysler) or the institutions that lent money to Chrysler based on the legal right and expectation that they would receive its assets before the UAW union would. Veteran political commentator Michael Barone also calls it “gangster government.” The UAW will also retain “lucrative” pension and health benefits, courtesy of the taxpayer.

The liberal USA Today put it more gently, but it, too, criticized the Obama Administration. Obama demonized the institutional creditors, like hedge funds, that helped Chrysler when it needed funds, and then were given the shaft in his sweetheart deal benefiting the UAW. He branded them as “speculators” when they objected to it, and then arranged a collusive sale of the company in all but name (giving up all its valuable assets) to circumvent their legal rights (a sale rubberstamped by a liberal bankruptcy judge). As a result of Obama’s attacks, these creditors have received death threats. Administration officials also threatened to smear the creditors in the press (which might violate the First Amendment).

But as USA Today notes, “those creditors have every right to balk. By doing so they are not only defending their own interests, they are standing up for the principles vital to functioning credit markets. Secured lenders get first dibs at recovering their losses if a company cannot meet its obligations. They will be less willing to lend if they fear they’ll be forced to surrender their position.”

While Chrysler’s lenders have lost almost all of their assets, the union has given up little. Indeed, USA Today notes, the UAW has “continued to press for retiree health benefits more generous than those available to taxpayers funding the bailout.” (Moderate Democrat Mickey Kaus describes UAW pension and health benefits under the deal as continuing to be “lucrative“).

As reporter and columnist Tim Carney notes, car czar (and Democratic fundraiser) Steven

“Rattner and Obama have decided that the United Auto Workers union should get 55 percent of Chrysler. At the same time, they’ve attacked many of Chrysler’s secured creditors — who, in a regular, nonpoliticized bankruptcy, would be repaid in full — for resisting this deal. In a federal complaint, these administration targets alleged: ‘The government exerted extreme pressure to coerce all of [Chrysler’s] constituencies into accepting a deal which is being done largely for the benefit of unsecured creditors at the expense of senior creditors.’

For the foreseeable future, Chrysler will be on the federal dole, both directly and indirectly. The Obama-Rattner plan puts UAW in charge of Chrysler, which is good news for the Democratic Party.

UAW’s political action committee spent $13.1 million last election cycle, a slow year for the union’s political arm. Of the PAC’s $2.3 million in direct contributions to candidates and candidate PACs, more than 99 percent went to Democrats. Of 42 Senate candidates to get UAW money, only one was Republican, and that was Arlen Specter.

The union’s PAC also reported $4.5 million in independent expenditures supporting Obama, plus an additional $423,000 opposing John McCain.

So, here’s the arrangement: You pay your taxes, the Obama administration funnels some of the money to Chrysler, whose profits enrich the UAW, which in turn funds Obama’s re-election.

Predictability, precedent and the rule of law have been replaced with the fiat of politicians. Chrysler could become a pass-through entity from taxpayers to the Democratic Party. And in charge of it all is a Democratic fundraiser. Boss Tweed would be proud.”

John McCain, by the way, opposed the auto bailout. I earlier explained why the auto bailout was illegal and economically destructive.

Contradicting earlier claims, Pennsylvania Senator Arlen Specter has switched to the Democratic Party, cementing the liberals’ filibuster-proof majority on most issues in the Senate.

What is strange about this is that the reason Specter gave for leaving the Republican Party was not social issues (Specter is socially liberal, not just on things like abortion, but also on racial preferences, which are unpopular with the general public and moderate voters), but rather his vote for the bloated $800 billion stimulus package, which will actually shrink the economy in the long run.

It’s not as if Obama has ended Bush’s lackluster record on the economy. Indeed, he’s appointed figures involved in the devastatingly costly Bush bailouts, like Treasury Secretary Tim Geithner, who “missed early signs of the crisis,” and helped ruin Indonesia’s economy, to high posts in his Administration.

Now, Obama is busy catering to the United Auto Workers union, at taxpayer expense, in the Detroit auto bailout. As Larry Kudlow notes,

“The government is about to take over GM in a plan that completely screws private bondholders and favors the unions. Get this: The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock. Huh? Did I miss something here? And Uncle Sam will have a controlling share of the stock with something close to 50 percent ownership. And no bankruptcy judge. So this is a political restructuring run by the White House, not a rule-of-law bankruptcy-court reorganization.

Meanwhile, top Obama adviser Valerie Jarrett opened the door wide on CNN yesterday to bank nationalization and CEO firings. Unfortunately, my take that the economic stress tests are a political stalking horse for more government ownership, more government control of the banks, and more government disruption of shareholder rights and normal corporate governance looks to be coming true.”

Obama has been a profligate big-spender. He claimed his $800 billion stimulus package was needed to avert “irreversible decline.” But the Congressional Budget Office concluded before and after its passage that the stimulus package will actually cut the size of the economy in the long run.

The stimulus package also guts welfare reform, which Specter voted for in 1996 and has claimed to support.

Obama’s budgets don’t add up, either, piling up $9.3 trillion in red ink, according to the Congressional Budget Office, a staggering $2.3 trillion more than Obama claimed, and more than double the deficits under the Bush baseline.

Liberal Republicans are claiming that the Republican Party should be a “big tent” that welcomes big spenders like Specter. But historically, the “big tent” was a concept designed to enable the GOP to compete in socially liberal parts of the country by offering socially-liberal, fiscally-conservative candidates — not an excuse for supporting big spending (like Obama’s) that goes even beyond Bush’s record of “fiscal profligacy.”

The Bush administration’s outline of its automaker bailout package lists some seemingly sensible changes in labor practices that GM and Chrysler need to make. (Ford, to its credit, is seeking private financing instead.)

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

  • Reduce debts by 2/3 via a debt for equity exchange.
  • Make one-half of VEBA payments in the form of stock.
  • Eliminate the jobs bank.
  • Work rules that are competitive with transplant auto manufacturers by 12/31/09.
  • Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

But…

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

Conditions with a loophole wide enough to drive a GMC truck through are hardly the stuff of which corporate transformations are made. To be fair, the Bush administration has recognized the biggest labor-related problems affecting these companies, so it is particularly unfortunate that it is being this timid.

The requirement to pay contributions to VEBAs (voluntary employee benefit associations) draws welcome attention to a looming problem. VEBAs are intended to serve as health care trusts that allow companies to pass their health insurance obligations on to another party, in this case a union. It makes sense for a company to want to shed those costs, and GM has already passed $35 million on to the United Auto Workers.

But, as Brian Johnson and Ryan Ellis of Americans for Tax Reform point out:

[T]he United Auto Workers has been given a free hand to define “health care” under the Treasury regulations—not coincidentally written by IRS officials of Presidents Lyndon Johnson and Jimmy Carter—which implement VEBAs.

Payments in the form of stock would at least help make VEBAs less liquid and thus prone to abuse — but even then, the requirement is only for half of payments, and is only a non-binding target for use of taxpayer money.

Finally, handing a large union a large wad of cash requires holding the union to a high standard of accountability, something for which President-elect Obama’s pick for Labor Secretary doesn’t provide confidence.

Thumbing its nose at the American people, who have opposed a bailout for automakers by a two-to-one margin in public opinion polls, the Bush Administration is pushing a $17.4 billion bailout for automakers General Motors and Chrysler, even though a similar bailout plan was rejected by the Senate earlier this month, on the ground that it would do nothing to fix what ails the auto industry.

Many of the beneficiaries of the bailout are well-to-do special interest groups who have been exploiting American consumers for years but would lose out if the automakers cut their costs by filing for bankruptcy: the United Auto Workers union, whose members receive $70 an hour in compensation (more than double what most American workers earn), and redundant auto dealers who can’t be terminated to cut automakers’ costs, thanks to state dealer franchise laws.

In an insult to voters’ intelligence, the Administration claims that the bailout is merely a loan, which will have to be paid back if the automakers turn out to be “unviable.”   Of course, if the automakers are unviable, they will, by definition, be unable to pay back the massive loan.  The only reason for the loan in the first place is that the automakers are verging on bankruptcy.  The so-called “conditions” that the Bush Administration placed on the “loan” are “non-binding” and a joke.

Even if the insolvent automakers did manage to pay the ”loan” back in the event they were found to be “unviable,” it would only be by failing to pay their other obligations, like moneys owed to the auto suppliers who increasingly do most of the actual auto construction in this country — and whose survival is one of the stated reasons for the bailout!

We earlier argued that the Bush Administration’s plan for an auto bailout was illegal, as are some other federal bailout measures in response to the mortgage meltdown and financial crisis.