GM’s tricky payback
President Obama’s tax-cheat treasury secretary, Tim Geithner, is trumpeting the fact that General Motors has paid back a small fraction of what taxpayers gave the company, noting that “GM had repaid in full the $4.7 billion balance it owed under the government’s Trouble Asset Relief Program.” “But this so-called ‘repayment’ was just an accounting trick. GM used government bailout money to make the ‘repayment,’ as the New York Times has noted.”
More importantly, that money is a drop in the bucket compared to what GM has received from taxpayers. The federal government has yet to recover the lion’s share of the more than $50 billion it loaned the company. Why? Because that $50 billion was mostly “converted into stock held by the Treasury Department.” That’s billions of dollars for stock in a company that, for all intents and purposes, was bankrupt. (GM just lost another $4.3 billion.)
The only reason GM had enough money left to pay back any of what it owes taxpayers is because of Toyota’s recent safety issues and recalls, which drove car buyers away from Toyota to GM and Ford. Only that kept GM from burning through most of the taxpayers’ money.
Even though GM still hasn’t paid back the $50 billion, and received billions in additional handouts through programs like the incredibly wasteful Cash for Clunkers (which cost taxpayers and used-car and car-parts businesses billions), Obama backers now claim that critics of the bailout owe Obama, GM, and the UAW “an apology.”
Ironically, GM would never have needed a bailout if it had just received relief from costly regulations such as CAFE rules (which wiped out at least 50,000 jobs) and dealer-franchise laws. That’s so despite GM’s massive burdens from excessive union wages and benefits (worth up to $70 an hour), and rigid union work rules.
The Obama Administration left those wasteful work rules and excessive benefits largely intact, and gave the United Auto Workers Union (UAW) a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company, and the company has value today only because the federal government pumped billions of taxpayer dollars into the company (and engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company).
Veteran political commentator Michael Barone called the Obama administration’s treatment of Chrysler and GM bondholders “gangster government.” Law professor and bankruptcy expert Todd Zywicki called it an attack on “the rule of law.”
Back in 2008, Zywicki prophetically warned that a bailout would prove worse for the auto industry than for automakers to just quickly file for bankruptcy. Zywicki noted that by enabling automakers to get rid of expensive union contracts and red tape, a “Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.” It would provide “a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules.” It would also help automakers get rid of redundant auto dealerships that should be terminated but aren’t because of state dealer franchise laws. Nobel Prize winning economist Gary Becker also argued that bankruptcy would have been better than a bailout in achieving “needed reforms.”
But the federal government ignored their wise advice, and chose to embark an incredibly costly bailout instead. The bailout of GM and Chrysler is similar in many ways to the British government’s unsuccessful auto bailout in the 1970s, which ultimately failed despite a cost in the billions.
The federal government used money from the $700 billion bank bailout for the auto industry bailout. Legal scholars at the Heritage Foundation, Clinton administration Labor Secretary Robert Reich and many other commentators have argued that using the bank-bailout money for auto bailouts was illegal.
Hans Bader is counsel to special projects at the Competitive Enterprise Institute. This article originally appeared on the CEI blog.