Halftime in Detroit
Taxpayers will be paying for the auto bailouts for decades to come.
FEBRUARY 25, 2012.
Politicians everywhere are forming encounter groups to commemorate the great Detroit rescue of 2008-2009, and given the selection of recent economic policies to feel good about, maybe the auto bailout is the best they can do. Still, amid Michigan's GOP primary and President Obama's re-election victory lap, this $81.8 billion-odd adventure in industrial policy could stand more scrutiny.
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.
And while GM, Chrysler and Ford may be out of financial danger, for now, their political liabilities continue to multiply. The Bush-Obama bailout isn't over because its terms increase the chances that one or more of the Big Three end up in trouble again. To adapt Clint Eastwood, it's halftime in Detroit.
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By 2007, after decades of deferral, Detroit was making some progress in rationalizing many of its problems, namely the long-term promises it had made to its workers. Gold-plated wages, benefits and work rules put the companies at a cost disadvantage. But the United Auto Workers made concessions on two-tier wages, insurance coverage and retirement plans when the private-equity group Cerebus recapitalized Chrysler and GM divested its health-care costs to a union-run trust fund. Management was investing to revamp product lines with better quality and features.
At the same time, however, government was busy diverting cash flow into cars that Americans don't want to buy. Thirty years of fuel-economy rules ensured that Detroit couldn't specialize in its most profitable models—pickups, minivans, SUVs—and had to continue making smaller sedans at high-cost UAW-organized factories that it sold at a loss. Congress and President Bush made this uneconomic mandate much worse with the 2007 energy bill that significantly increased mileage standards.
Then the recession hit, and the Big Three started lobbying for a taxpayer lifeline in summer 2008, after Bear Stearns but before the credit panic. Congress bestowed $25 billion in loans in the name of "green retooling" and a shift to hybrid and electric vehicles.
Still bleeding cash, and by November 2008 harmed like all businesses by the meltdown, the auto executives continued to wheedle for public aid. A formal bailout failed in the Senate, but the Bush Administration used the Troubled Asset Relief Program as a honey pot to tide over GM with a $19.4 billion bridge loan and Chrysler with $4 billion. Ford declined help but favored saving its neighbors.
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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.
Detroit and the auto makers claim there was no liquidity (nobody was buying cars or lending) for normal bankruptcy to function. But lenders might have come forward if the government backstop wasn't crowding out private financing—or perhaps the industry would be more attractive to private capital if every business decision wasn't a political decision too. No one can know now.
At any rate, even if GM and Chrysler had been liquidated in Chapter 11, Americans could still buy Toyotas, Nissans and other cars that the transplants usually make in the South and Midwest. Those companies might have bought the assets that would have been sold in an economically rational way. All this would have been done under the supervision of a neutral bankruptcy judge or receiver.
That was the real issue for the White House because of its potential damage to union labor. So it proceeded to orchestrate an out-of-court prepackaged bankruptcy. Bond holders would have taken a severe haircut no matter what, but Mr. Obama's force majeure subordinated their rights to the UAW's. 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.
Last November, Mr. Obama's enviroteers tightened fuel economy regulations again, jacking them up to 54.5 miles per gallon by 2025—well beyond the standards Congress set in 2007. The auto makers agreed despite their misgivings because as wards of the state they had no political choice. So Chrysler, GM and Ford will still be forced to make cars that dealers struggle to sell profitably, only many more of them.
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These companies are not run by morons. They make small cars profitably overseas and are among the biggest-selling brands in China and Latin America. In the U.S. by contrast, cars are a minority of the top 20 models, while Ford and Chevy pickups are among the top three sellers year after year. But if American consumers don't want to sacrifice horsepower and size for fuel efficiency, Washington won't take no for an answer. The new Obama budget includes a $10,000 tax credit for consumers to buy the green cars that they otherwise wouldn't. Will mandated purchases be next?
The point is that the auto bailout isn't an example of enlightened government revitalizing an industry after a market failure. It is a bailout in the wake of failed government policies and bad management that may keep going and going as Washington does whatever it takes to make sure Detroit keeps doing its political bidding.
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