In his 1953 confirmation hearing for Secretary of Defense in the
incoming Eisenhower administration, former General Motors CEO
Charles “Engine Charlie” Wilson was asked how he would handle
conflicts of interests in the Defense Department’s dealings with
his old firm. Wilson replied
that “for years I thought that what was good for our country was
good for General Motors, and vice versa.”
For decades, Wilson’s comment — misquoted as “What’s good
for General Motors is good for the country” — has been
paraded by liberals as an example of conservatives putting the
concerns of a giant corporation ahead of those of the rest of
America.
But since GM’s multi-billion dollar bailout and government
takeover, the misquote from Wilson has become the philosophy
of the Obama administration. They are treating the success of
the initial public offering of the new GM, which will
likely happen this Thursday, as proof positive that that the auto
industry rescue and much of the rest of Obama’s economic policies
must be good for the country.
But what exactly is so remarkable about a company coming
back to life after a $65 billion taxpayer bailout, additional
billions in tax breaks not available to other companies, and
even
an amazing “sovereign immunity” exemption for this IPO from
anti-fraud securities laws and lawsuits? With this massive infusion
of government aid and favors, even a company selling ketchup
Popsicles to women wearing white gloves would likely show a
profitable quarter! (Hat tip for the Popsicle analogy to David
Spade in Tommy Boy — one of my favorite movies about
business.)
But how successful and profitable the new GM will be —
and there are still many doubts that linger on the company’s
financial condition and unfunded liabilities (see this amazing
piece
from that right-wing bastion NPR entitled “Reasons to Sit Out GM’s
Initial Stock Offering) — is not the right question to ask if
its bailout and takeover were good for the economy. The primary
question should not even be how fast or whether taxpayers get their
money back (and many experts
believe they likely never will recover fully).
As I
wrote a year and a half ago on the Competitive Enterprise
Institute’s blog OpenMarket.org, “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.” By
this measure, due to the precedent set by the government running
roughshod over the contractual rights of Chrysler’s secured
lenders, GM’s bondholders, and dealers franchised to sell both
brands of vehicles, the bailout/takeover is a complete
failure.
The bankruptcy courts rubber-stamped a reorganization plan
designed by Obama’s “Team Auto” officials such as Democrat moneyman
Steven Rattner that disregarded two centuries of bankruptcy
precedent to massively favor the United Auto Workers over
bondholders. As a result, according to several prominent business
academics, the cost of capital will likely experience a significant
rise for all U.S. businesses and entrepreneurs who wish to form new
firms.
As Todd Zywicki, professor of law at George Mason
University, so eloquently put it in a Wall Street
Journal op-ed:
“By stepping over the bright line between the rule of law and the
arbitrary behavior of men, President Obama may have created a
thousand new failing businesses. That is, businesses that might
have received financing before but that now will not, since lenders
face the potential of future government confiscation.”
A look at the disproportionate equity stakes received by
the UAW shows the depth of the bondholder robbery that took place.
As described by
Ross Kaminsky of the Heartland Institute and Rossputin
blog:
In a stunning transfer of wealth from private investors to
the government and unions, the UAW will own 75% more of the new GM
than the investors holding $27 billion of debt to the existing
company, even though GM’s own bankruptcy filing shows that the
“employee obligations” to the UAW are billions of dollars less than
the debt owed to bondholders. And bondholders will get 1/6th the
ownership stake of the government despite having lent more than
half as much money to GM.
In what probably was one of the most shameful moments of
his administration, President Obama
demagogued GM bondholders and Chrysler secured lenders as
“a group of investment firms and hedge funds… who held out while
everybody else made sacrifices.” First off, even hedge fund
managers — such as Obama supporter and progressive benefactor
George Soros — have the right to have valid contracts enforced.
This is America, after all, and we still have the rule of law
here.
Second, many of the bondholders and lenders were actually
pension funds serving the very middle-class families and retirees
the president always claims to be “protecting.” The Chrysler
bankruptcy was actually halted by an ultimately unsuccessful
lawsuit by
Indiana state Treasurer Richard Mourdock on behalf of state
pensions serving police officers and teachers that had lent to
Chrysler.
From a pure analysis from the perspective of what
progressives like to call “social justice” — who gets what —
there is a striking inconsistency among the disparate treatment of
UAW workers and retirees and similarly situated (if not poorer)
teachers and police officers. As Barry Adler, professor of law at
New Your University,
testified to the Congressional Oversight Panel that scrutinizes
TARP funds, “one might well wonder why the UAW funds should be
favored over other retirement funds.”
Like George Mason’s Zywicki, Adler writes that the
precedent set by these arbitrary and capricious bankruptcies are
significantly raising the costs of capital for other firms. “The
automaker bankruptcies may usher in a period where the specter of
insolvency will increase the cost of capital in an economy where
affordable credit is sorely needed,” Adler states. He adds that
“the cases establish a precedent that could undermine the
bankruptcy process in the future, even if the government receded
from the scene.”
What about the jobs? It certainly saved some at a very
high cost, but probably not for the country as a whole.
Unemployment, after all, is still around 10 percent.
Numbers like “a million jobs” are thrown out, but
unfortunately the bailout/takeover proponents use the same shoddy
“saved or created” methodology used to justify the stimulus. No one
knows what would have happened if the government would have stayed
out. But during the same time, as I
wrote in TAS at the time, some pretty big firms —
such as the nation’s second largest shopping mall owner General
Growth Properties — went through the bankruptcy process and
reorganized without any government funding. Even if GM or Chrysler
had to liquidate, portions of their businesses would likely have
been bought out by rivals such as Ford, Hyundai, and Toyota, and
some workers would have been reemployed, albeit with less generous
benefits (the workers now have benefits more generous than most
blue-collar and some white-collar workers).
In fact, as a whole, the auto rescue may result in net job
losses, both because of the likely increase in the cost of capital
from bondholder treatment, and because of the rapid shutdown of
auto dealers that has cost tens of thousands of jobs. Some dealers
would have and should have been closed in a normal bankruptcy, but
the special inspector general for TARP (SIGTARP) found in a
report that the extraordinarily “rapid pace” of dealer closings
resulted in “tens of thousands of dealership jobs [that] were
immediately put in jeopardy.”
The SIGTARP also found that “job losses at terminated
dealerships were apparently not a substantial factor in the Auto
Team’s consideration of the dealership termination issue.” In other
words, the sales forces didn’t have the clout with the Obama
administration that the UAW has.
So in this case, what was good for GM, Chrysler, and the
UAW, put the screws to almost everyone else.
(This article is not intended to offer investment advice on
the GMO IPO being offered on the backs of taxpayers, car dealership
workers, and pension funds.)
CEI Research Associate Andrew Kwiatkowski
contributed to this article.
