The great Obama auto dealer job shaft

John Berlau Senior Fellow, CEI
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Matthew Boyle’s groundbreaking reports this week in The Daily Caller provide further confirmation that in the Obama auto bailouts, all jobs were not created equal. The administration moved heaven and earth to save the jobs and generous benefits of General Motors and Chrysler workers who belonged to the United Auto Workers, ripping up the contracts of bondholders and secured creditors — including middle-class retirees and teachers and police officers in state pension plans — to give the UAW an enlarged stake in the new companies. “As a result,” notes Amy Payne of The Heritage Foundation, “even after the reorganization, GM still has higher labor costs ($56 an hour) than any of its foreign-based competitors.”

But as shown by TheDC’s reporting and a video by the conservative group Let Freedom Ring, non-UAW workers affected by the bankruptcies were not so lucky. As Boyle writes, emails indicate direct intervention by the Obama Treasury Department to give UAW workers preferential treatment at one-time GM subsidiary Delphi, which manufactures auto parts. UAW workers there were given full pension benefits, while nonunion workers had their retirement plans slashed by as much as 70 percent.

But it wasn’t just Delphi workers who were treated as “less equal” than their union counterparts. At the nation’s auto dealers, about 100,000 mostly blue-collar jobs — a number approaching the total workforce of GM and Chrysler, according to the Cleveland Plain Dealer — were put on the chopping block by “Team Auto,” the Obama administration’s auto-bailout task force, which insisted on extraordinarily rapid closures of auto dealerships during the government-organized bankruptcy proceedings.

At the behest of Team Auto, GM and Chrysler closed more than 2,000 dealerships — leaving more than 100,000 dealer employees scrambling for new jobs, pensions and health care — within a time span of a few months. By contrast, Mitt Romney’s old private equity firm Bain Capital is taking heat from Obama supporters for laying off 750 workers at one Kansas City steel plant nearly eight years after it purchased the plant’s parent company.

An ad Mitt Romney’s campaign released last week highlights the impact of the closures on one dealership in Lyndhurst, Ohio. The owner, Al Zarzour, speaks of having to lay off “30-some” employees when his Chevrolet dealership was put on the GM closure list in 2009.

Obama supporters as well as Washington Post blogger Jennifer Rubin, a Romney supporter, have criticized the ad, claiming that the dealer closings were necessary for the automakers’ viability and that virtually no dealership jobs would exist had the auto companies gone into a normal bankruptcy. But the acclaimed new book Bailout by Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program (TARP), shows that the first half of this critique is false and the second half is highly tenuous.

“Is Romney saying that in a ‘managed bankruptcy’ these dealerships wouldn’t have closed?” asks Rubin. Romney hasn’t responded yet, but Barofsky argues forcefully that the Obama administration pushed for many more closures than bankruptcy and restructuring experts deemed necessary.

In Bailout — other aspects of which have been praised by the liberal Huffington Post — Barofsky paints a far more devastating portrait of the Obama administration’s arbitrary dealer closures than does the Romney campaign, whose attacks on them have been relatively mild. Contrary to the administration’s claim that the dealer closings were entirely GM’s and Chrysler’s decisions, Barofsky writes that Obama’s “auto team had pressured the companies to close the dealerships” more rapidly and in greater numbers than the firms had wished.

Barofsky concludes that “relatively little thought had gone into Treasury’s determination that the dealership closings had to be immediate.” He reports that after “interviewing many of the same experts Treasury had consulted,” his group of auditors “found remarkably little support for the auto team’s determination that the viability of GM and Chrysler depended on their closing so many dealerships so quickly.”

In Rubin’s critique of Romney’s ad, she asks, “Do Republicans actually believe that GM didn’t need to reduce costs and capacity?” She seems to be unaware that dealerships, which basically have franchises from automakers to sell vehicles, impose no direct costs on the car manufacturers. As Obama’s auto-bailout czar Steven Rattner notes in his book Overhaul, “auto companies don’t pay their dealers anything directly.”

So why close so many dealerships so quickly? Rattner argues that “every industry expert agreed that having fewer, more productive dealers results in higher total sales and lower marketing expenses for an automaker.”

But, Barofsky writes, although experts agreed that “dealerships should be reduced over time, there was substantive disagreement about where dealers should be closed and how quickly it should be done.” In particular, he recalls, several experts consulted by his office disputed that any rural dealerships needed to be closed, citing the “distinct advantage that GM and Chrysler had in those areas over foreign competitors.”

Barofsky explains that GM appeared to agree. Initially only 18 percent of the dealership closings it targeted were in rural areas. But “that number jumped dramatically,” he writes, “after Treasury directed it to accelerate the closings, with rural dealerships making up nearly half the dealerships slated for termination.”

Given this evidence, it is correct to argue that many dealers would have fared better if GM and Chrysler had gone through a traditional, court-approved bankruptcy along the lines that Romney advocated in a 2008 op-ed, rather than through the politicized bankruptcy that Obama’s team put together. At the very least, it would probably have given dealers like Zarzour more time to make arrangements with GM’s competitors, minimizing job losses.

Meanwhile, the Obama administration continues to fudge the number of jobs “created” by the bailout, including in its total thousands of jobs added at the domestic plants of foreign automakers like Toyota and Hyundai. Ohio Governor John Kasich points out that, of the 73,000 jobs created in his state since 2011, only 700 were “direct jobs” in auto manufacturing. PolitiFact, which examines campaign claims, largely backs up Kasich’s claim.

And then there are the jobs not created and businesses not opened because of the shabby treatment of GM’s bondholders and Chrysler’s secured lenders. The Obama administration designed a restructuring that disregarded two centuries of bankruptcy precedent to give disproportionate ownership stakes to the UAW and, in Chrysler’s case, Fiat. This was such a seismic shift in contract law that it caused a huge drop in the ranking of the U.S. in the annual “Index of Economic Freedom.”

There are many victims of the government’s meddling in the auto industry, and their stories need to be told.

John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute. Mark Beatty, a research associate at CEI, contributed to this article.