Chrysler

Adding Insult to Auto Dealers’ Injury

by Ivan Osorio on July 10, 2009

in Bailout Watch, Economy

If anything could make finding yourself out of business overnight any worse, it is to have to pay a penalty for it. That’s what now threatens some GM and Chrysler dealers whose factory agreements are not being renewed as part of those companies’ government-led restructuring. Many of those soon-to-be-defunct dealers may find themselves exposed to having to pay withdrawal penalties into the union pension funds into which they will no longer pay.

Now, the Detroit automakers overextended their dealer networks — but that is no justification for penalizing local auto dealers for GM’s and Chrysler’s mistakes. To address this potential problem, Rep. John Kline (R-Minn.) has introduced the Auto Dealers Pension Fairness Act (H.R. 2793), which would direct the Presidential Task Force on the Auto Industry to report to Congress on which dealers are to be closed and bar pension withdrawal penalties until 60 days after the Task Force reports to Congress –  and thus allow Congress to determine a course of action.

This is only fair, but I’m not holding my breath waiting for any unions to endorse it. Many union pension plans are severely underfunded — due in large part to union pension fund managers’ use of funds to pursue political agendas at public company shareholder meetings — and this would only add to their troubles.

For more on union pension funds, see here, here, here, and here.

Supreme Court Vacates Stay Order in Chrysler Case, Refuses to Rule on Legal Challenges At This Time

by Hans Bader on June 9, 2009 · 5 comments

in Bailout Watch, Economy, Labor, Legal, Mobility, Politics as Usual, Regulation

The full Supreme Court just vacated the stay that Justice Ginsburg earlier entered that had temporarily blocked the government’s plan for Chrysler. Why it did so is mysterious, since it noted that it was not ruling on the merits of the legal and constitutional challenges to the government’s actions, and cautioned that “a denial of a stay is not a decision on the merits of the underlying legal issues.”

Justice Ginsburg yesterday granted a stay temporarily blocking the government’s plan for Chrysler, which would give effectively give most of the company to the UAW union, while paving the way for a dubious merger with Fiat. The stay was sought by pension funds that were (along with taxpayers) ripped off by the government’s plan.

The government’s handling of Chrysler trampled on federal bankruptcy laws, the federal TARP bailout statute, and the Constitution.

The federal government has said that even if it is acting illegally, the courts are powerless to do anything about it, since the pension funds challenging its actions have no legal standing to complain. A federal bankruptcy judge bought this argument. But that is false, as I explained yesterday.

Now, the government may argue that once the giveaway of Chrysler to the UAW and merger with Fiat goes through, that the legal challenges have become moot, preventing the courts from reviewing any legal violations that led to that merger. (I doubt the validity of that argument, since the giveaway will have lasting adverse consequences for the pension funds, above and beyond the dangerous precedent it sets for them and other secured creditors and capital markets, and the courts could still fashion relief to address some of the pension funds’ injuries; but the government’s argument may well be accepted, just as its standing argument earlier was accepted by the bankruptcy court. There is enormous political pressure on the courts to make the whole challenge go away).

The bailouts have been economically destructive. The Washington Post today notes that as a result of being bailed out, General Motors is now even more subject to “political pressures,” and as a result plans to build a money-losing politically-correct car “even if it loses money, taxpayer money.” Obama recently pressured General Motors to keep its headquarters in high-tax, crime-ridden, racist, economically-collapsing Detroit.

General Motors and Chrysler would have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s. If the automakers had ripped up their collective bargaining agreements in a regular bankruptcy, they would now be in a position to recover without taxpayer funds, since it was rising gas prices last year that pummeled their ability to sell the big cars that are their profit center, and gas prices have fallen enormously since their peak last year.

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an 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 violates the bank-bailout statute.

The federal government is effectively giving Chrysler to the UAW union, while giving the shaft to other Chrysler stakeholders, like the Indiana state pension funds that invested in loans to Chrysler. As law professors like Todd Zywicki have noted, that violates federal bankruptcy laws.

Indiana Treasurer Richard Mourdock was right to challenge it in court. Mourdock correctly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a small fraction of what they are owed by Chrysler, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

Supreme Court Temporarily Blocks Illegal Chrysler Giveaway to UAW

by Hans Bader on June 9, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Legal, Mobility, Politics as Usual, Regulation

Supreme Court Justice Ruth Bader Ginsburg yesterday granted a stay temporarily blocking the government’s plan for Chrysler, which would give effectively give most of the company to the UAW union, while paving the way for a dubious merger with Fiat. The stay was sought by pension funds that were (along with taxpayers) ripped off by the government’s plan.

The pension funds deserve to win, since the government has trampled on federal bankruptcy laws, the federal TARP bailout statute, and the Constitution in forcing its plan down the pension funds’ throat.

But there’s no telling how long the stay will last, or if the Supreme Court will reach the merits of the pension funds’ claims. The federal government says that even if it is acting illegally, the courts are powerless to do anything about it, since the pension funds challenging its actions have no legal standing to complain. A federal bankruptcy judge bought this argument. But it is false, as I explained yesterday, since the funds do indeed have standing, even if the government were right in its exaggerated claims about what will happen if its plan is blocked.

The bailouts have been economically destructive, politicizing auto industry decisions. The Washington Post today notes that as a result of being bailed out, General Motors is now even more subject to “political pressures,” and as a result plans to build a money-losing politically-correct car “even if it loses money, taxpayer money.” Obama recently pressured General Motors to keep its headquarters in high-tax, crime-ridden, racist, economically-collapsing Detroit.

General Motors and Chrysler would have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s. If the automakers had ripped up their collective bargaining agreements in a regular bankruptcy, they would now be in a position to recover without taxpayer funds, since it was rising gas prices last year that pummeled their ability to sell the big cars that are their profit center, and gas prices have fallen enormously since their peak last year.

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an 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 violates the bank-bailout statute.

The federal government is effectively giving Chrysler to the UAW union, while giving the shaft to other Chrysler stakeholders, like the Indiana state pension funds that invested in loans to Chrysler. As law professors like Todd Zywicki have noted, that violates federal bankruptcy laws.

Indiana Treasurer Richard Mourdock was right to challenge it in court. Mourdock correctly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a small fraction of what they are owed by Chrysler, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

LibertyWeek 46: The Great Porn Wall of China

by Richard Morrison on June 9, 2009

in CEI Projects, Podcast

Your faithful host Richard Morrison welcomes back special guest co-hosts William Yeatman and Michelle Minton for Episode 46 (listen HERE!). We start with the investors that are getting worked over by the politically-distorted bankruptcy of Chrysler, the ascension of the Swedish Pirate Party to the European Parliament and the Great Porn Wall of China. We then move on to proof that beer is better for you than water, a sign that airline travel may get more expensive, and an example of how voters deal with corrupt politicians. Finally, we wind things up with some very educational Olympic News.

Illegal Takeover of Chrysler: Pension Funds Have Standing in Indiana State Police Pension Trust v. Chrysler, LLC

by Hans Bader on June 8, 2009 · 1 comment

in Bailout Watch, Economy, Employment, Labor, Legal, Mobility, Politics as Usual, Regulation

Earlier, I wrote about the Indiana pension funds’ challenge to the Obama Administration’s plan to effectively give Chrysler to the UAW Union, while cheating the pension funds that loaned it money (and ripping off taxpayers), and how that violates federal bankruptcy laws.

The government is now arguing that the pension funds don’t have legal standing to challenge the plan, since they can’t prove they will be worse off than if the Administration had just sat back and let Chrysler go bankrupt naturally. The government says that the pension funds might have received even less in such a bankruptcy than the pennies on the dollar they are slated to receive under the government’s plan, under which it intervened and injected billions in taxpayer money into Chrysler, and then engineered a sale of Chrysler’s valuable asserts to a new company mostly owned by the UAW that is part of planned merger with Italian carmaker Fiat. (The Administration has completely failed to do its homework before pushing for a merger with Fiat, which is alleged to have Enron-like accounting problems, and massive shady dealings that could haunt taxpayers and autoworkers alike in the future).

The government is wrong. The pension funds have standing even if their victory would leave them no better off, but would eliminate the unfair preference received by the UAW. For example, in Heckler v. Mathews (1984), the Supreme Court held that male reverse-discrimination plaintiffs had standing to challenge a federal government gender-preference that benefited women, even if the challenge would only result in benefits being taken away from the women, and would not result in men getting any additional benefits.

Moreover, the funds, as secured creditors, will be enormously adversely affected in future bankruptcies by the disturbing precedent set by the Chrysler bankruptcy, in which an unsecured creditor — the UAW — received far more than secured creditors — the Indiana state pension funds that loaned money to Chrysler under the solemn understanding that they would stand first in line in any bankruptcy. Losing this lawsuit will strip them of an enormous bargaining chip in future bankruptcies. The loss of a bargaining chip is sufficient grounds for standing, as the Supreme Court made clear in Clinton v. City of New York (1998), where it allowed farmers to challenge the line-item veto as a violation of the Constitution when it resulted in the President vetoing legislation that would have given a bargaining chip to use in potentially purchasing a potato processing plant. Bankruptcy law experts have noted the precedent set by the Chrysler bankruptcy will have a great impact on General Motors and other bankruptcies in the future. An inability to compete on fair terms in the future is grounds for standing. See Gratz v. Bollinger (2003) (student who alleged he would apply as a transfer student to a college if it would stop considering race in admissions had standing to challenge college’s race-conscious admissions policy). That is precisely what the pension funds allege.

Moreover, even if the Obama Administration’s unfair plan to give Chrysler to the UAW were blocked, it would just find alternative ways, fairer to the pension funds and less biased towards the UAW, to keep Chrysler going, through taxpayer funds if necessary. Letting Chrysler go out of existence would put UAW members out of work, and the Administration would be loath to let that happen, given that the UAW spent millions electing Obama, and made millions more in donations to the liberal lawmakers who now dominate Capitol Hill.

A federal appeals court has refused to block the Administration’s illegal auto bailout, which rips off taxpayers and pension funds to enrich the UAW union. The pension funds that challenged the bailout then appealed to the U.S. Supreme Court. The bailout violates the federal TARP statute by diverting financial-system bailout funds to a takeover of the auto industry. And the government’s reorganization plan for Chrysler violates federal bankruptcy laws by ripping off lenders to give the company to the UAW union.

(The bailouts have been counterproductive. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s. If the automakers had ripped up their collective bargaining agreements in a regular bankruptcy, they would now be in a position to recover without taxpayer funds, since it was rising gas prices last year that pummeled their ability to sell the big cars that are their profit center, and gas prices have fallen enormously since their peak last year.)

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of “financial institution,” which the Administration claims includes virtually any institution, financial or not. The bailout statute defines “financial institutions” eligible for the bailout as “including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company.” Never mind that Congress listed as examples of “financial institutions” only entities that were banks, insurance companies, or financial institutions, not automakers. (Congress rejected auto bailout legislation last year precisely because it lacked safeguards against the use of bailout money to prop up uncompetitively high UAW wages — exactly what the Obama Administration is using the money for now. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute).

Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that using the money for auto bailouts violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term’s definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that’s not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government’s incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock was right to raise these important legal questions in court. Mourdock correctly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government’s poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Supreme Circuit should rule in favor of its appeal. The Supreme Court should grant review, since the issues are of overriding national importance, and since the Second Circuit Court of Appeal’s ruling refusing to block the government’s plan has created a circuit split by countenancing circumvention of the bankruptcy laws as long applied in circuits across the country.

Court Rebuffs Challenge to Illegal Chrysler Bailout and Takeover; Pension Funds Will Appeal to Supreme Court

by Hans Bader on June 5, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Legal, Mobility, Politics as Usual, Regulation

A federal appeals court has refused to block the Administration’s illegal auto bailout, which rips off taxpayers and pension funds to enrich the UAW union. The pension funds that challenged the bailout will now appeal to the U.S. Supreme Court. The bailout violates the federal TARP statute by diverting financial-system bailout funds to a takeover of the auto industry. And the government’s reorganization plan for Chrysler violates federal bankruptcy laws by ripping off lenders to give the company to the UAW union.

As I noted earlier, the Indiana State Teachers’ Retirement Fund is challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government’s unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

(The bailouts have been counterproductive. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of “financial institution,” which the Administration claims includes virtually any institution, financial or not. The bailout statute defines “financial institutions” eligible for the bailout as “including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company.” Never mind that Congress listed as examples of “financial institutions” only entities that were banks, insurance companies, or financial institutions, not automakers. (Congress rejected auto bailout legislation last year precisely because it lacked safeguards against the use of bailout money to prop up uncompetitively high UAW wages — exactly what the Obama Administration is using the money for now. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute).

Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that using the money for auto bailouts violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term’s definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that’s not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government’s incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock was right to raise these important legal questions in court. Mourdock correctly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government’s poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

On June 2, the Second Circuit Court of Appeals entered a temporary stay of the bankruptcy judge’s ruling rubberstamping the government’s plans for Chrysler, in an appeal brought by the Indiana State Teachers’ Retirement Fund. On June 5, however, it refused to block the government’s plan for Chrysler. The case is In re Chrysler, LLC, Docket # 09-2311-mb.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Supreme Circuit should rule in favor of its appeal. The Supreme Court should grant review, since the issues are of overriding national importance, and the Second Circuit has created a circuit split by countenancing circumvention of the bankruptcy laws as long applied in circuits across the country.

Illegal, Unfair Auto Bailout That Harms Retirees and Taxpayers Challenged in Chrysler Bankruptcy

by Hans Bader on June 4, 2009 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Legal, Mobility, Politics as Usual, Regulation

The Indiana State Teachers’ Retirement Fund is rightly challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government’s unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

(The bailouts are doing no good. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy, endangering their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of “financial institution,” which the Administration claims includes virtually any institution, financial or not. The bailout statute defines “financial institutions” eligible for the bailout as “including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company.” Never mind that Congress listed as examples of “financial institutions” only entities that were banks, insurance companies, or financial institutions, not automakers. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute.

Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that this violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term’s definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that’s not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government’s incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock is to be commended for raising these important legal questions in court. Mourdock rightly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government’s poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

Earlier, a panel of the U.S. Court of Appeals for the Second Circuit, including Chief Judge Dennis Jacobs, and Judges Amalya Kearse and Robert Sack, entered a temporary stay of the bankruptcy judge’s ruling rubberstamping the government’s plans for Chrysler, in an appeal brought by the Indiana State Teachers’ Retirement Fund. The case is In re Chrysler, LLC, Second Circuit Docket # 09-2311-mb.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Second Circuit should rule in favor of its appeal.

Cheers for Indiana Treasurer’s halt to Chrysler Bankruptcy

by John Berlau on June 4, 2009

in Bailout Watch, Features, Zeitgeist

Kudos to the judges on the Second Circuit U.S. Court of Appeals for putting a stay on the Obama administration’s nationalization scheme for the bankruptcy sale of Chrysler LLC. Kudos also to Indiana state Treasurer Richard Mourdock for standing up for the middle-income teachers and police officers in the state pension funds and making sure that contracts affecting their retirement savings are respected.

When President Obama announced the Supreme Court nomination of Sonia Sotomayor, who coincidentally is an appeals court judge on the Second Circuit, he praised judicial qualities that are directly relevant to the courts overseeing the bankruptcies of Chrysler and General Motors. The president said that the qualities he most respected in judges were, “a commitment to impartial justice, a respect for precedent, and a determination to faithfully apply the law to the facts at hand,” as well as “an understanding of how the world works and how ordinary people live.”

As such, President Obama and his auto task force should respect the role of the bankruptcy courts and recognize that their role is not to rubber stamp the administration’s plan to take over Chrysler and GM, but to apply bankruptcy precedents and faithfully apply the law to the facts at hand, with an understanding of how contracts work in the real world and of the “ordinary people” who own the car companies’ debt securities as individual investors or through their IRAs and 401(k)s.

The bankruptcy judges also need to look beyond the individual circumstances of Chrysler and GM to weigh how the treatment of creditor contracts in these cases will affect American credit markets in the future. If courts cave to politicians’ whims and give secured creditors and bondholders less than they would receive under traditional bankruptcy precedents, our credit markets will suffer further damage as lenders and investors will be less willing to put their capital at risk in companies whose contracts could be abrogated at politicians’ demand.

Bankruptcy is a not an executive but a judicial function, and judges in the car companies’ cases should take as much time as they need to weigh the competing interests and ensure an equitable outcome. The measure of success should not be how fast Chrysler and GM emerge from this bankruptcy, but the degree to which contracts are honored in an impartial process.

Obama Panders to the UAW: $30 Billion More for Wasteful Auto Bailout

by Hans Bader on June 2, 2009

in Bailout Watch, Economy, Employment, Energy, Global Warming, International, Politics as Usual, Stimulus to Nowhere, Trade

The federal government is giving another $30 billion in taxpayer money to General Motors to allow it to operate without having to cut excessive union wages. The Obama Administration is “gambling” on its ability to turn around the company under government control.

The Obama Administration has said it will now interfere not just with the “selection of the company’s board of directors,” but also in “fundamental corporate decisions,” and “major corporate events and transactions.” For example, Obama recently pressured GM to keep its headquarters in crime-ridden, economically-collapsing Detroit.

The $30 billion is excessive even if the Administration’s wildest hopes come true. Even if federal money were the only way to keep GM afloat (which it isn’t — GM could be made competitive simply by cutting its excessively high employee wages to lower levels that still exceed average American wages), and even if the bailout saved not only GM jobs but also the jobs of “related suppliers and dealers,” “the price of the U.S. government bailout comes to about $125,000 per employee, including those working for related suppliers and dealers,” according to the Washington Post.

If GM had rejected a federal bailout and takeover, and simply filed for bankruptcy in December, it would be recovering on its own 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 wage and benefits and rigid work rules, and it would also be benefiting from the recent collapse of oil prices. It was record-high gas prices that forced consumers to buy smaller cars last year, battering GM’s finances, which were based around selling big cars. But gas prices have fallen from over $4 a gallon last year to $2.50 now. So the bailout is saving no jobs, it’s just allowing GM to keep union wages high at taxpayer expense, while keeping it from becoming competitive in the long run. (The recent drop in gas prices will also mask the effects of incompetent management of GM by the Obama Administration. On the other hand, the Administration’s CAFE and global warming regulations, which GM opposed before it was taken over by the Administration, will destroy tens of thousands of autoworker jobs).

The bailout is neither necessary nor likely to be successful in the long run. In its failed auto bailout in the 1970s, Britain did the same things that Obama is doing, 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.

“‘Countries . . . protect ailing auto companies on the theory that they need to protect jobs,’ said Maryann N. Keller, an independent auto analyst. ‘But it’s not clear that protecting companies leads to the revival of those companies.’ As for the jobs, Keller said ‘a lot of that is bunk’ because Americans would buy the same number of cars no matter who the maker is. ‘Somebody would still make the parts,’ she said. ‘They would just be made for a different customer.’”

Why is the Obama Administration doing something so wasteful? Politics. The UAW is one of the biggest sources of money and manpower for the Democratic Party and Obama, and the UAW is now calling the shots. (The UAW spent millions electing Obama).

While taxpayers have spent tens of billions of dollars bailing out the Detroit automakers, the UAW has made little in the way of sacrifices, refusing to accept cuts in pay that could keep the automakers able to compete with lower-cost competitors. As even the liberal Washington Post lamented, “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. Meanwhile, the government has ripped off pension funds and bondholders who loaned the car companies money.

The bailouts aren’t the only outrageous waste of taxpayer money taking place right now. Even bigger is the wasteful $800 billion stimulus package, which is harming the economy, both by triggering foolish trade wars that have backfired and cost at least 40,000 jobs, and by driving up interest rates for businesses that need to borrow money to expand or create jobs. (The government is keeping down interest rates on its own debt by printing vast sums of money to buy its own bonds, in order to finance the exploding national debt, which will result in massively higher taxes).

Stimulus Package Shrinks Economy, Destroys Private Sector Jobs

by Hans Bader on May 31, 2009 · 2 comments

in Bailout Watch, Economy, Employment, International, Labor, Odds & Ends, Politics as Usual, Precaution & Risk, Stimulus to Nowhere, Trade

Most of the $800 billion stimulus package has yet to be spent, but it’s already harming the economy, both by triggering trade wars that have cost at least 40,000 jobs, and by driving up interest rates for businesses that need to borrow money to expand or create jobs. (The government is keeping down interest rates on its own debt by printing vast sums of money to buy its own bonds, in order to finance the exploding national debt, which will result in massively higher taxes).

As economist Arnold Kling explains, “most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy. According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now,” when the economy will already be in recovery, and “when the economy will need little, if any, stimulus. This is the flaw with using spending rather than tax cuts as a stimulus. The lags are longer when you use spending. Of course, if the real goal is to promote government at the expense of civil society” through “political favoritism, then the stimulus is working exactly as intended.”

1.2 million Americans have lost their jobs since Obama signed the stimulus package into law. The Congressional Budget Office predicted it would shrink the economy “in the long run” (contrary to Obama’s claim that it would prevent “irreversible decline“), but create jobs in the short run.

But the stimulus package turned out to be harmful even in the short run, because it was so badly designed. It poured money into sectors of the economy where no help is needed because unemployment is low, while siphoning money out of sectors where unemployment is high. Moreover, “states hit hardest by the recession are getting the least amount of stimulus spending.”

The stimulus package is just one example of the Obama Administration running up the national debt to bail out the more fortunate while sticking less fortunate people with the bill. The auto bailouts are another. They run up the national debt to keep unskilled auto workers enjoying wages and benefits that are much better than those enjoyed by the average American (while ripping off pension funds and bondholders). As Mickey Kaus notes, “Why should the government tax unskilled workers making $18 an hour, who haven’t bankrupted their employers, in order to protect unskilled workers making $28 an hour, and who have bankrupted their employers, from having to take a pay cut?” (Actually, the Chrysler autoworkers are making far more than $28 an hour, when you factor in benefits).

The stimulus package has directly destroyed tens of thousands of jobs. A provision in the stimulus package that blocked a mere 97 Mexican truckers from U.S. roads “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade,” destroying 40,000 American jobs. And its vague “buy American” provisions, despite doing little to promote purchases of U.S. products, managed to ignite a trade war with Canada.

Obama’s policies echo those of Herbert Hoover, who helped spawn the Great Depression through his protectionism and tax increases. One of Obama’s own advisers admits that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” Even the Washington Post, which endorsed Obama and once supported his auto bailouts, now has soured on them and their waste of taxpayer money.

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