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Obama’s Auto Bailout Lies
Posted By Arnold Ahlert On February 1, 2012 @ 12:38 am In Daily Mailer,FrontPage | 16 Comments
In what has become part of his general re-election strategy, president Barack Obama is touting  the government bailout of automakers GM and Chrysler as a great success. “The American auto industry was on the verge of collapse. And some politicians were willing to let it just die. We said no,” Obama told college students last week in Ann Arbor, Michigan. “We believe in the workers of this state.” Yet much like other pronouncements of “fact” that come from this president, the devil is in the details, many of which don’t remotely square with the reality. Much like the banks, the auto industry was “too big to fail,” and it was “saved” in exactly the same fashion: with a multi-billion dollar bailout, courtesy of the American taxpayer.
Let’s begin with the president’s central assertion, i.e. the American auto industry was on the verge of collapse. While there is no question that GM and Chrysler were in trouble, several  other U.S. auto producers, such as Ford, Honda and Toyota, were in no danger of going under. The reason GM and Chrysler were in trouble was largely due to their own shortcomings, namely mismanagement, and labor costs that were out of control. Moreover as this article from 2005 reveals , GM was in trouble long before the current financial crisis exacerbated its problems. From 2000 to 2005, GM had already lost 74 percent of its market share, was saddled with more than $1600 per vehicle in “legacy costs” (read: “union pensions and health benefits”) and, because of its union agreements, the automaker couldn’t close plants or lay off workers without paying a stiff penalty, or run plants at less than 80% capacity–whether they made money or not.
Thus for GM and Chrysler as well, it wasn’t a matter of if, but when such profligacy would be their eventual undoing. As the financial crisis hit, both automakers were on the verge of collapse. Yet that reality didn’t sway Congress, which, at that time, was insufficiently attuned to the “never let a crisis go to waste” mentality that would eventually lead to multi-billion dollar bailouts of the banking sector and insurance giant AIG. Congress voted against emergency loans in late 2008.
At that point George W. Bush made the kind of end run around Congress that president Obama has raised to an art form: after being informed by Treasury Secretary Hank Paulson that he (Paulson) had no authority to use funds from the Troubled Assets Relief Program (TARP) for an auto bailout, the former president authorized $17.4 billion in loans with the proviso that both companies develop restructuring plans after Obama became president. Mr. Obama, as is his wont, then “doubled down” on his determination to use taxpayers funds to save both companies.
No doubt he was aided by a document  produced by the Center for Automotive Research (CAR). Their worst case scenario, a 100 percent cessation of operations by the “Detroit Three” (Ford, which never took bailout money, was included in the scenario) “would be a loss of nearly 3.0 million jobs in the U.S. economy–comprised of 239,341 jobs at the Detroit Three, 973,969 indirect/supplier jobs and over 1.7 million spin-off (expenditure-induced) jobs.” Yet as it is pointed out here , “the report gave no consideration to the more realistic scenario that one or two of the Detroit automakers might turn to Chapter 11 reorganization.”
Why not Chapter 11 bankruptcy? Politics. The same unions that threw their support behind Barack Obama’s presidency wanted quid pro quo. A Chapter 11 bankruptcy proceeding was viewed as a lose-lose proposition for the United Auto Workers Union (UAW), whose contracts would have undoubtedly been re-worked to include major concessions, and a pro-union president eager to portray himself as a savior of a major American industry. That the administration made a complete mockery  of bankruptcy laws in the process was of little consequence.
The details were truly odious. For example, Chrysler’s “secured creditors,” who should have been first in line in any legal bankruptcy proceeding, were given 29 cents on the dollar, while lower priority union creditors received 40 cents. UAW retirees at Delphi, GM’s auto supplier, got 100 percent of their pension and retirement benefits, while 21,000 non-union, salaried employees retained only 30 percent of their pensions, and none of their life and health insurance. GM will be allowed  to deduct up to $45 billion of its previous losses from its future profits, even though in a typical bankruptcy a new company is not allowed to take a tax write-off against the old one. GM’s secured creditors were also denied a “deficiency claim”–meaning that the bankrupt company has to pay back at least a portion of what they are owed at a later date–to which they were entitled.
This flouting of the law was one of the more pernicious aspects of the auto bailout success fairy tale. The administration’s principle claim for the bailout, a total of $85 billion in taxpayer subsidization, was that the capital markets were “frozen,” meaning GM and Chrysler couldn’t get private funds necessary to continue operations. Whether that’s true or not cannot be proven. Much like the bank bailouts, Americans are forced to accept what occurred, not what might have happened. Yet by establishing the idea that bankruptcy laws were now “subjective,” the Obama administration has virtually assured future lenders that the rule of law may no longer protect them.
Then there is “profitability.” The administration is touting GM’s return to profitability as proof the bailout was resounding success. GM did in fact make $3.2 billion in the first quarter of 2011, its best performance in ten years and its fifth-consecutive profitable quarter. But $1.8 billion of the $3.2 billion is the result of one-time-only sales of its shares in Ally Financial and Delphi. Furthermore, GM and Chrysler’s post-bankruptcy labor costs are $58 an hour, compared to $70 an hour pre-bankruptcy. While these numbers are comparable to Toyota’s labor costs of $56 an hour, the industry’s cost curve is being set by firms such as Hyundai and Kia, whose labor costs are $40 an hour. In addition, due to the finagling of bankruptcy laws in favor of the UAW, GM still has unfunded pension obligations of $27 billion that are due in 2014–meaning it is quite possible bankruptcy has merely been postponed.
And there is the so-called 800 pound gorilla of taxpayer bailouts that makes any reference to the word “profit” laughable. In its report to Congress this month, the Treasury Department was forced to boost  its estimate of government losses in the bailout by $170 million from $23.6 billion to $23.77 billion. This follows a boost from $14 billion to $23.6 billion last fall. Treasury spokesman Matthew Anderson was undeterred. “The auto industry rescue helped save one million jobs and is still projected to cost dramatically less than many had expected during the crisis,” he said. Perhaps, as is often the case in Washington, D.C. less-than-projected losses constitute a “profit.”
So was the auto bailout a success? Once again the ideological divide looms large. For those who believe in the use of taxpayer funds to underwrite private companies “too big to fail” (thereby virtually assuring a return to risky and/or irresponsible behavior); the abandonment of the rule of law for the “greater good;” the distortion of the free markets for political considerations (government picking winners and losers) and the seemingly limitless expansion of executive power absent congressional input, the answer is yes.
For those who believe in free-market capitalism tempered by the proper amount of government intervention to reduce cronyism and cheating, the necessity of badly run companies to go bankrupt in order to rein in risky behavior or unreasonable labor costs — and the idea that 300 million Americans acting in their own best interests have far more wisdom than arrogant government bureaucrats operating a command-and-control economy from Washington, D.C. — the answer is no.
In other words, among the myriad number of issues facing Americans in the 2012 election, the definition of the word “success” is also up for grabs.
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URLs in this post:
 Image: http://frontpagemag.com/wp-content/uploads/2012/01/Picture-51.gif
 touting: http://www.foxnews.com/politics/2012/01/31/president-obama-emphasizes-auto-bailouts-as-triumph-his-administration/
 several: http://www.cato-at-liberty.org/the-presidents-heroics-and-other-tall-tales-about-the-auto-industry/
 reveals: http://www.businessweek.com/magazine/content/05_19/b3932001_mz001.htm
 document: http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__001.pdf
 here: http://www.cato.org/pubs/policy_report/v31n6/cpr31n6-1.pdf
 mockery: http://reason.com/archives/2011/07/05/driving-to-delusionville
 allowed: http://reason.org/news/show/lasting-implications-gm-bailout
 boost: http://www.detroitnews.com/article/20120130/AUTO01/201300393/1148/AUTO01/Treasury-ups-auto-bailout-loss-estimate
 Click here: http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Ddigital-text&field-keywords=david+horowitz&rh=n%3A133140011%2Ck%3Adavid+horowitz&ajr=0#/ref=sr_st?keywords=david+horowitz&qid=1316459840&rh=n%3A133140011%2Ck%3Adavid+horowitz&sort=daterank
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