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September 6, 2012

The Cold Hard Truth about the GM and Chrysler Bailouts That The Obama Administration Doesn't Want You To Know

Topics: Political News and commentaries

Over at Cato today, Randal O'Toole gets right down to the cold hard truth about Obama's bailout of GM and Chrysler, and the truth is most definitely not what the Team Obama claims or wants you to know.

Bottom line, the Obama auto bailout probably didn't save many jobs (though it probably did keep union worker pay uncompetitively high); instead, it is more likely that the Obama administration's action prolonged the recession by discouraging private investment in American industry:

Vice presidential candidate Paul Ryan has been accused of lying when he claimed that Obama broke a promise by letting a Wisconsin auto factory close, when in fact the factory closed before Obama took office. Although that isn't precisely what Ryan said, there is some validity to the accusation that his statement was deceptive.

But numerous Obama supporters are playing just as loose with the facts when they say that, if Obama hadn't rescued GM and Chrysler, far more factories would have closed permanently. That is simply untrue. While news agencies have fact-checked some of the things being said at the Democratic convention, I haven't seen any challenges of this claim.

Both GM and Chrysler were headed for bankruptcy. If they had gone bankrupt under chapter 11, most of their factories would have stayed open and they would have continued making and selling cars. Bankruptcy would have allowed the companies to avoid interest and dividend payments for a time, and to renegotiate union contracts. Under bankruptcy laws, stockholders would have lost the value of their stocks, but bond owners -- who have first claim to company assets and profits--would have been paid off, if not in whole than at least in part.

Instead of letting the companies declare bankruptcy, Obama decided to "bail them out" by taking them over. Once the administration had control of the companies, it had them file for bankruptcy, just as they would have done without the government takeover. Stockholders still lost everything, but so did Chrysler's bond holders. Instead of renegotiating union contracts, the administration gave the unions greater say over the companies. In other words, the administration didn't bail out the companies; it bailed out the unions at the expense of (in Chrysler's case) the bondholders.

In doing so, the administration created uncertainty in the bond market. Bonds were supposed to be safer investments than stocks. But who would want to invest in long-term bonds if the government could step in at any time and void the legal rights of the bond owners? The result is that bond sellers must be willing to pay more interest to attract buyers.

Simply put, besides breaking long-standing bankruptcy law, the Obama Administration gave special treatment to the UAW above and beyond what other creditors and unions received, took billions from bondholders, and cost U.S. taxpayers about $23 billion on the 2008-2009 bailout of General Motors and Chrysler. The extra UAW subsidies in the auto bailout cost an additional $26.5 billion (the Obama Administration did in fact redistribute $26.5 billion more to the UAW than it would have received had it been treated as it usually would in bankruptcy proceedings) -- more than the entire foreign aid budget in 2011. The Detroit auto bailout was, in fact, a UAW bailout. The only real winners from the GM bailout were unions, which were protected from pay cuts, from losing their right to overtime pay after less than 40 hours a week, and from cuts to their extremely generous benefits. They faced only minor tweaks in their inefficient union work rules.

All of this is not to say that the auto industry should not have been bailed out, at all. Given that sufficient financing was probably not going to be available at the time, a bailout was probably appropriate ... but only AFTER GM and Chrysler went through proper bankruptcy ... just as Mitt Romney has suggested. This would have, as the Cato piece points out, allowed the companies to reorganize, renegotiate completely uncompetitive union contracts and benefits, allowed them to avoid interest and dividend payments for a time, and greatly reduced the overall cost to taxpayers.

Meanwhile, according to Forbes, GM is headed toward bankruptcy - again. The company is once again losing market share, and it seems unable to develop products that are truly competitive in the U.S. market.

That's the way corrupt Chicago gutter politics works ... and we don't need another four years of it, our nation has had enough of it already.

Related: About Those 4.5 Million New Jobs, Mr. President

Posted by Hyscience at September 6, 2012 10:27 AM

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