It's a sign of grim times indeed when the Obama administra tion is touting a potential $14 billion loss to the taxpayers as a great economic success.
The White House is running on its auto bailouts as courageous acts that saved the industrial Midwest. It's a telling point of pride. In bragging about the bailouts of GM and Chrysler, the administration is boasting of a process shot through with lawlessness and political favoritism -- not to mention reckless disregard for taxpayer dollars.
The administration believes it trumps all criticism with one data point: GM and Chrysler are still with us. GM has even been making money, and had the biggest IPO in American history last November.
Yet, as The Atlantic's Megan McArdle tartly observes, it shouldn't have been in doubt that if government threw $80 billion at two companies, not expecting to get all of it back, it could save them. She points out that the loss from the bailouts (the administration's estimate is $14 billion) will be close to the entire market capitalization of GM in 2007. It will be several times as big as the company's 2008 market capitalization.
McArdle figures that, at a cost of roughly $10 billion to $20 billion, we might as well have given GM's pre-bankruptcy workforce of 75,000 hourly workers $250,000 each and called it a day.
The government has also given GM a special tax break that will save it $14 billion on its US tax bill, and is trying to induce consumers to buy GM's signature new product, the absurdly expensive electric Chevy Volt, by giving them a $7,500 tax credit on its $41,000 sticker price.
With all this support, GM should be the world's greatest industrial concern. It's hardly that, although it's much improved. We can thank Chapter 11, the tried-and-true method for turning around bankrupt companies that still have value.
Writing in the journal National Affairs, Todd Zywicki makes a distinction between "economically failed" companies that disappear when they go bankrupt and "financially distressed" companies that can still work. With a skilled workforce, advanced factories and prized brands, GM was clearly the latter. "Virtually every major airline has been through bankruptcy at least once, as have K-Mart, Macy's and a host of other familiar brands that are still very much in business," Zywicki writes.
Somewhere in GM there was a viable car company trying to get out. Through Chapter 11, GM pared down wages and benefits, shed uneconomical dealerships and ditched unnecessary brands. This was a classic restructuring. If anything, without government intervention, it would have been more thorough-going and effective.
As an exercise in what Zywicki calls "state capitalism," the bailout was a procedural horror show:
* It was probably illegal to funnel TARP funds into the companies -- they may not have been car companies worthy of the name any longer, but they certainly weren't "financial institutions."
* Chrysler's creditors, who held secured bonds and were guaranteed repayment first, got forced into taking 29 cents on the dollar. In contrast, the United Auto Workers' pension plan got 40 cents on the dollar.
* The creditors of both Chrysler and GM were denied their usual right to have a say in the reorganizations. The government was in a strong position to bully some of these creditors, because they themselves received TARP funds.
* Once they had their hooks in them, the Obama administration and Congress made the companies do their bidding, insisting they build politically correct hybrid cars and keep open politically favored dealerships.
Ultimately, the moral stature of capitalism depends on a structure of rules that applies to firms large and small, politically connected and not. By this standard, the auto bailouts fail miserably, and so perfectly distill Obamanomics.
comments.lowry@ nationalreview.com
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