The GM bailout is touted as a huge success for progressive government bailout of failed capitalist ideology. None of the GOP candidates seem capable of challenging this view. Everything comes at a cost and the cost of this bailout is very high, both in real current dollars and in the future cost of the moral hazard that will infect those large enterprises that will continue to make decisions based on the backstop of their government mother.
Perhaps this bailout was a bailout of the unions more than the company. One wonders if this would have happened if GM was a non union shop such as steel producer Nucor. The usurping of the bankruptcy law to save union jobs has to leave future investors a little wary, and could increase the cost of capital for large union shops. While we think of just those evil Wall Street bankers who were stiffed, one of the investors burned by the Bush/ Obama bailout was the Indiana teacher’s retirement fund.
Fortunately The Wall Street Journal was up to the task of challenging the prevailing wisdom of the bailouts in Halftime in Detroit, 2/25/12.
The bailouts worked, the story goes, because General Motors and Chrysler still exist and their stocks are trading above $0. Yet existence is a lousy measure of success, given that the car makers were able to shed billions of dollars of debt and labor obligations in their government-managed and -financed bankruptcies.
Ordinary bankruptcy would have been a trauma, no question. It would have meant pain for laid-off workers and exacerbated the recession, even if the auto makers posed no systemic risk. The taxpayer tab for guaranteed pensions would have been expensive.
But the key point is that Chapter 11 would have provided an orderly workout, giving the auto makers the legal protection to clean up balance sheets, modify contracts and restructure under due process. The steel industry reorganized itself through bankruptcy a little over a decade ago, rationalizing its capacity and labor agreements. American Airlines is the latest legacy carrier to enter bankruptcy, and the planes are still in the air.
Even Steve Rattner, who led the auto task force and is its most ardent defender, conceded to the Detroit News in December that “We didn’t ask any active worker to cut his or her pay, we didn’t ask them to sacrifice any of their pension and we maybe could have asked them to do a little bit more.”
Thus the bailout become a tool for less discipline, not more, when Chrysler entered bankruptcy with $8.1 billion in government financing and GM with $30.1 billion. The government became the majority shareholder in the latter and the UAW in the former. Taxpayers still own 26% of GM, and shares will need to rise to $53 from their current $26 to recoup the Bush-Obama investment.
However things shake out, it will be only a fraction of the true costs in precedent and politicized investment. The bailouts signaled that major companies with union labor are too politically big to fail and undermined confidence in the rule of law. More troubling, the conversion of Detroit from an indirect to transparent Washington client continues to distort the auto market.