GM has announced an all-time record profit for 2011 of $7.6 billion dollars. You will hear that endlessly this year as Obama takes credit for saving the auto companies. So once again we need to take a look back and do some fact checking.
The auto bailouts, as they are known, were bridge loans extended to GM, Chrysler and their financing arms. What was their purpose? To prevent the auto companies from going into bankruptcy. As you’ll recall, they did anyway. So on its face, the claim of any bailout success is false. Bankruptcy, or restructuring, means a company has failed and needs protection from its creditors under bankruptcy law. GM and Chrysler clearly failed by going bankrupt so any claim of success due to the bailouts is a lie pure and simple.
The claim that is often made is that by extending the bailout funds, the Treasury rescued the companies from completely failing and thus saved over 1 million jobs. Some industry reports claimed 3 million potential job losses throughout the entire supply chain. What happens when a company files for bankruptcy protection? They are allowed to reorganize under the protection of law which is exactly what they did. Going bankrupt doesn’t mean all the factories close, the dealerships, the suppliers and other vendors, etc. That’s called going out of business, liquidation, a completely different scenario than bankruptcy. GM and Chrysler weren’t planning on going out of business, they were trying to avoid bankruptcy, so the claim of saving over a million jobs is unsubstantiated.
Now, what is the administration and the bailout defenders claim? That due to the credit crisis brought on by the recession, there would be no credit lifeline for the auto companies and they would just be allowed to fail. Accordingly, we had to tap the TARP funds to provide that lifeline no one else was capable of providing. They were needed to provide operating cash and loan funds for consumers. The claim is always made that total liquidation would occur without allowing for the likelihood of reorganization under bankruptcy protection. Scaremongering is certainly nothing new with government when it needs to put forth an agenda item and repayment of union support in the Obama election was on that agenda.
So what did transpire? The government tapped the TARP fund without proper legal authority as it was intended for financial institutions and brokered a pre-planned bankruptcy deal. The government argument was that they were the only option for debtor-in-possession financing due to the credit crunch from the recession. This is where Romney cries foul. He declared GM and Chrysler should have gone through bankruptcy first and then had the government step in with the loan guarantees and that it should have been done 6 months earlier thus avoiding the earlier bridge loans that failed. Also, a standard Chapter 11 without the Obama ‘deal’ wouldn’t have rewarded the unions and screwed the bondholders. As to the claim that no private DIP financing was available at the time, in fact the largest private DIP deal ever by a factor of two was completed for LyondellBasell Industries just 3 months earlier.
The Obama deal saw the bondholders taking a much larger haircut than the UAW pension plan. Deficiency claims were denied to wronged creditors. A ‘section 363’ sale was completed essentially selling the old GM to the new GM without allowing the creditors any say as with a normal asset sale. We’ve also seen some ‘funny money’ accounting in which GM has shifted funds from one capital credit line to pay off its outstanding loan early and we all saw the commercials crowing about it. They then turned right around and borrowed $10 billion to tool up to meet the governments new CAFE standards.
How do we determine if the $85 billion dollar industry bailout was a success? Was it preferable to the alternative? The alternative through the eyes of the bailout defenders was nothing less than total failure and the loss of the entire industry including millions of jobs.If you buy that premise, of course anything short of it could be termed a success. Even in the aftermath, the administration has been blurring the lines. They have claimed 113,000 industry jobs were restored with credit going to the bailouts. Yet, those were overall industry jobs including foreign automakers, not just the bailout recipients. GM and Chrysler still haven’t returned to pre-bankruptcy employment levels, so it’s another false claim.
What is fact is that the Treasury has estimated a loss of $23.77 billion dollars from the bailouts that will never be recovered. Let’s not forget that TARP money was borrowed money which we are paying interest on. It’s also fact that Chrysler is now a foreign-owned company with the Fiat acquisition of 58.5% of its holdings. It’s also fact that thousands of dealerships were forced to close leading directly to tens of thousands of job losses. The N.A.D.A. estimates 110,000 jobs lost. It’s true too that GM cut nearly 50,000 jobs as part of the bankruptcy deal. There also intangible losses. The Obama intervention in the bankruptcy process will undoubtedly be detrimental to future loan structuring as stakeholders will be wary of standard bankruptcy protocol being subverted. Then there is the culture created by bailouts. Companies deemed too big to fail know they can act recklessly and irresponsibly when there will always be a government provided lifeline available to backstop them.
Those points are all losers. The question is would the industry have imploded as claimed absent the bailouts? Or would the automakers have gone through a structured, orderly bankruptcy, reorganized without screwing the bondholders as the Obama directed plan did, and emerge just as well off? Without the $23.77 billion dollar taxpayer loss. Would there have been job losses without the bankruptcy deal? Absolutely. Would it be equal to the forced cuts? That’s a question we can only speculate on, but taken in context with all the other negatives, it’s hard to see how anyone can claim a net positive. Also, how do you feel about your tax dollars being used to prepare a takeover by a foreign company as Fiat did with Chrysler? What is indisputable is that the bailouts didn’t prevent what they were intended to prevent, which was bankruptcy, so they failed. The more pertinent question is did bankruptcy save the auto industry? So far, so good, but easy street is far from here. A Middle East war and $5 buck a gallon gas or worse will hurt sales. The E.P.A. CAFE mileage standards increases are also going to be a massive cost borne by consumers. The profits are good for now. The profit sharing is great for the rank and file. But the industry is in no way safe going forward.