The True Story of the Auto Bailouts - Revisited

Last March, I posted an article, mostly of quotes on the true nature of the auto bailout. Mr. Obama has been seen on the news of late, touting this as the big success of his administration. GM execs aren't exactly happy to be his poster child, I'm sure his lack of popularity is a drag on sales. We need to always keep in mind the illegal nature of these bailouts. Fortunately, David Skeel of the WSJ is on the job.

If the government hadn't stepped in and dictated the terms of the restructuring, the story goes, General Motors and Chrysler would have collapsed, and at least a million jobs would have been lost. The bailouts averted disaster, and they did so at remarkably little cost.
The problem with this happy story is that neither of its parts is accurate.
. . .
If the government wanted to "sell" the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. Victims of defective GM and Chrysler cars waiting to be paid damages weren't so fortunate—they'll end up getting nothing or next to nothing.
. . .
But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift.

The pile up of lies with regards to the auto bailout is stupendous. Here's hoping creative Republican campaign commericials excoriate the President for orchestrating a web of lies to enhance his own image. Here's betting they won't.

Closing Out the Auto Follies? Hope, but no Change

The Obama administration admitted that the auto bailout will cost taxpayers $14 billion. Of course, that's if you believe their accounting. Judging by prior statements on the repayment of loans, I rather doubt it. Additionally, the slide in car sales this month, may cause this loss to increase. Dean previously posted:

So, if you are scoring at home you have a) a bankruptcy cramdown where unions were shoved to the head of the line before secured creditors, b) a pack of blatant public lies regarding the payback of the TARP loan, c) a $9 billion loss on the first IPO last November and now this... a massive stock dump in order to clear the books ahead of the 2012 presidential elections.

Of course, it was all worth it, for the jobs, according to the administration. Never mind that other car companies would have probably scarfed up assets and workers or that a normal bankruptcy could have resulted in a healthier GM than the one that emerged from this bankruptcy.

In other economic news, consumer confidence is dropping, factories had their biggest one-month slow down since 1984, and the most recent jobs report showed only 38,000 jobs were created in May.


Consumer confidence graph from the Atlantic. If the economy is in recovery, we should see increasing consumer sentiment, which is clearly not the case.

The True Story of the Auto Bailouts

As we move towards the 2012 election, Obama will probably say of his Republican opponent that he or she would have opposed or did oppose the auto maker bailout plan. I should hope that this would be true, but we need to educate the public about the truth of how the bailouts of GM and Chrysler have been colossal failures that harmed the economy and the rule of law. Todd Zywicki, writing in National Affairs, has the whole story, here are some excerpts:

The bailouts of General Motors and Chrysler have been held up by President Obama and his supporters as a great success story — proof that, by working together, government and business can save jobs and strengthen the economy. But this popular narrative is dangerously misleading. Far from a success story, the events surrounding the bailouts offer a cautionary tale of executive overreach. And their example clarifies the Obama administration's broader approach to economic policy — an approach that is both harmful to economic growth and dangerous to the rule of law.
. . .
The bailouts of GM and Chrysler at the end of 2008 — and the extension of those bailouts in the beginning of 2009 — were therefore both unnecessary and very likely illegal. But that was hardly the end of the story.
. . .
At first, the fact that the companies' creditors (and especially Chrysler's creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP.
. . .
Every piece of the "success story" of the auto bailout would thus seem to be in error. The bailout was not absolutely necessary and was pursued by means of dubious legality; the bankruptcies were highly irregular and inefficient; and the companies that have emerged from bankruptcy are far from lean and fit. They are certainly in no position to repay taxpayers for the generous loans they were given.

The whole thing is worth a read. Get educated and get ready.

Union Bailout in the Lame Duck Session?

Shane Atwell links to a Washington Examiner story by Mark Hemingway pointing to a potential budget busting morass that could be created by the lame duck pairing of Pelosi and Reid.

The other piece of legislation is, not surprisingly, a bailout bill offered by Sen. Bob Casey, D-Pa., and co-sponsored by Senate Majority Whip Richard Durbin, D-Ill. (A similar piece of legislation is being offered in the House by Rep. Earl Pomeroy, D-N.D.) The bill would make failing union pension plans fully backed by the Pension Benefit Guaranty Corp., a government-sponsored entity.

In the plain language of the bill, "obligations of the corporation which are financed by the fund created by this subsection shall be obligations of the United States." It creates a fund that these pension plans will be able to go to that will be filled by taxpayer funds as needed through the normal appropriations process.

The Tea Party will have to keep a very close eye on the lame duck session of Congress. The bigger the Democrat losses, the more mischief they will try to create.

Knowing Nothing About Cars

...doesn't prevent you from running an auto company. A year ago I opined that Big Ed Whitacre didn't need to know anything about cars to run GM. Today both Michelle Malkin and Dean alerted me to the TARP Inspector General report that shows that the decision to close Chrysler and GM dealerships was essentially arbitrary and counterproductive; but Big Ed is still GM CEO with the full backing of the Shareholder-in-Chief. Dean's commentary is highly recommended. You can read the whole TARP IG report here.

Michelle Malkin points out the most outrageous point on page 33 of the report:

Mr. Bloom, the current head of the Auto Team, confirmed that the Auto Team "could have left any one component [of the restructuring plan] alone," but that doing so would have been inconsistent with the President's mandate for "shared sacrifice."

In other words, concerns over social justice, rather than the most economically viable plan to allow the companies to recover, guided decision making. This will play itself out in the health care arena as all manner of insurance companies and hospitals will be harmed in the name of "shared sacrifice" as Obamacare is implemented. This is more than mere justicialism, it puts squarely on the road to socialism as the economic basis of free enterprise is destroyed.

Planet Bailout

Today's Drudge Report "mini-headlines" looked approximately like this:













Without linking to the articles, it is clear we are leaving Bailout Nation and entering Planet Bailout. The U.S. involvement in this global stupidity is growing, quickly erasing any schadenfreude I might have been nursing after watching Greek communists in action. In the what could go wrong category, consider this AP headline:

Federal Reserve opens credit line to Europe

WASHINGTON – The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

Hey, that's our money. Who gave the Fed the authority to do that?

Meanwhile, the marginal tax rate for the middle class hovers around 40%. Interesting reading here and here on the perverse effects of our marginal tax rates. And the Democrats are set to increase taxes on dividends and capital gains. It's hard enough for the average person to save money as it is, because the average middle income earner loses 40 cents on every new dollar they make. Over the last century, investing in stocks was the best way to increase wealth, but Obama and the Democrats want to make that harder as well.

With ballooning deficits and an apparent commitment to bail out the entire world, no wonder the Tea in Tea Party stands for Taxed Enough Already. Reversing the mushrooming size of government and the idea that handing out dollops of cash will willy-nilly will solve any problem is the signature issue of the Tea Party. We must keep up this fight, because the latest actions of an unaccountable Federal Reserve show how much danger we are in.

Just keep in mind that this is the ultimate destination for your hard earned dollars when the fed ships it to Europe:




Might as well light our dollars on fire here, and save the expense of sending them to Greece.

TBTF Hits the Euro Zone - Acropolis Now

I am close to canceling my subscription to The Economist. Today's leader (not yet online) calls for swift and decisive action to bail out the Greeks despite their obstinate refusal to do anything about the root cause of their massive (115% of GDP) debt. I am typing the money quote (can't link it yet):

What then is to be done? The mounting crisis - and the fact that Greece will almost certainly not pay everybody back on time - will renew some calls to abandon it. That would spell chaos for Greece, European banks and other European countries: the effect would indeed be Lehman-like. hence the necessity, even at this stage, of a show of financial force, linked to the construction of a stronger firewall between Greece and Europe's other shaky countries. The priority for European policy-makers is to do the same as governments eventually did with the banks: to get ahead of the crisis and to convince investors that they will spend whatever is necessary.

In other words, invoke To Big Too Fail, again. The leader goes on to argue that for the Germans, this is not an act of charity, but of self interest. I say hogwash, because the crisis is that of moral hazard. Unless some nation or some large bank is allowed to fail and suffer the consequences, we are doomed to permanent bailouts. The Greeks to date have refused to take any significant action that would prevent a recurrence of their current predicament. KT is again spot on with today's analysis:

Greece has borrowed money until they can't service their debts. Also, they aren't competitive in the world market - their wages are too high relative to what they have to sell. You can tell this because they have huge trade imbalances. Greece is insolvent - that is, it's not that they need a loan to carry them through bad times, it's that they don't make enough money to make their loan payments. Bailing them out now will just sign you up for another bailout later.

Here in America we see this thinking in the supposed financial reform introduced by that paragon of fiscal rectitude, Chris Dodd. Dean points out the institutionalization of TBTF in the U.S bill in his excellent recap of the Heritage Foundation analysis. A snippet:

Creates a protected class of “too big to fail” firms. Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States if they encounter “material financial distress.” These firms would be subject to enhanced regulation. However, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk.

When are we going to get it. The bailouts just keep coming because .... we just keep doing bailouts. STOP!

Lost Decade

And I don't mean the one that just ended, bad as it was in some ways. My concern is for the next decade, as the current bubble is wound down, or not. The Economist reports on the economic history of the last twenty years in Japan, subtitled: Twenty years on Japan is still paying its bubble-era bills.

Graphic shows how Japanese investors have fled stocks to bonds as deflationary expectations and lack of business vitality put the economy into a long decline.

The most pernicious effects of the bust, economists say, have been transmitted via banks and businesses. Banks found themselves loaded down with non-performing loans. Belatedly they faced up to many of their losses, restructured and consolidated. But according to Takuji Aida, an economist at UBS in Japan, long-term yields remained very low because of deflationary expectations, thereby flattening the yield curve (the difference between short- and long-term interest rates). That prevented banks from earning their way out of crisis, so lending remains weak.

Companies, meanwhile, have been focused on paying down debt, as well as coping with deflation in the domestic economy and competition from cut-price imports. Large exporters were forced to restructure and enjoyed a long boom from 2002 to 2007. But firms in more protected areas of the domestic economy have fared badly: profitability, wages and investment have declined in the past decade.

As Reason magazine pointed out last year, Obama is following the same failed policies that Japan followed in the 1990s in their efforts to revitalize their economy.

But that stimulus did not save the Japanese economy in the 1990s; far from it. The ensuing period came to be known as the Lost Decade, characterized by multiple recessions, an annual average growth rate of less than 1 percent, and a two-decade decline in stock prices and corporate profits.

The Japanese government’s easing of credit rates, instead of spurring real demand, created artificial demand. Federal loans and stimulus spending were not economically productive, and they vastly increased the nation’s debt and prolonged the economic malaise. Worse, businesses spent critical time on the sidelines, waiting for government bailouts and other centralized actions, instead of speedily consolidating their losses, clearing their balance sheets of bad investments, and reorganizing.

I am optimistic about America, and always have been, but it is a long term optimism based on the character of our people and the genius of our constitution. In the short term, we are not immune to losing a decade either, the 1930s come immediately to mind, for example, and government actions, such as higher tariffs, intended to help the economy actually delayed recovery then as well.

I also blame Republicans, as much as Democrats for this. Bush and Paulson initiated the first bail out, with Republicans in Congress along for the ride. John McCain could have won the last election; the turning point came near the second debate, which he had proposed to postpone to deal with the mounting banking and AIG crisis. His failure to break with Bush and the Democrats and oppose the first bail out package signaled the end of his maverick image. In hindsight, had he been able to stop the bail out we would have all been better off, and McCain might be President.

This is why the Tea Party movement is so valuable, because we recognize that the key problems facing America have to do with the size of the debt and expansion of the federal government into the private sector. This expansion is guaranteed to slow the unwinding of failed investments needed for a healthy recovery. We have already seen various examples of this skulduggery, Congress intervening to prevent Government Motors from closing dealerships, and shading dealings by the Fed to get Bank of America to buy Merrill Lynch, to name two.

McCain was right to try to rebrand the GOP as the party of reform, but reform and reduced government go hand in hand. Time to step up our demands to end porkulus and bail outs.

Edward Whitacre Knows Nothing About Cars

"Big" Ed Whitacre said he's ready to learn about cars and the auto industry today. Before the advent of Bailout Nation, this might have been a problem. Why is that, you might ask? Because, Ed is the new Chair of Government or is it General Motors. From the news:

“I don’t know anything about cars,” Whitacre, 67, said yesterday in an interview after his appointment. “A business is a business, and I think I can learn about cars. I’m not that old, and I think the business principles are the same.”

Hey Dude, stop worrying about cars, you only need to worry about your shareholder in chief. I'm sure Ed's prior experience at AT&T with its constant interactions with the courts, the Congress and regulatory apparatus makes him the perfect fit for the new GM. Just don't expect any ideas about how to build better cars.