The Auto Bailout and the Rule of Law
When President Dwight Eisenhower named Charles Wilson — then the president of General Motors — to be his secretary of defense in 1953, some senators considering the nomination wondered whether Wilson could distinguish his loyalty to GM from his obligations to the country. Wilson assured them that he could, but then added that he did not think a conflict would ever come up. "For years I have thought that what was good for the country was good for General Motors, and vice versa," he said in his confirmation hearing.
Wilson's statement — especially that "vice versa" — was long considered the epitome of corporatist excess. To many, it represented the view that the government existed to advance the interests of large corporations (and, of course, vice versa), even if the arrangement came at the expense of average citizens and workers.
In the past three years, however, Wilson's attitude has come back into vogue, as a new approach to the relationship between the government and the private sector has taken hold in Washington. That approach — a kind of state capitalism that seeks to entangle the government and large corporations in order to allow for careful management of the economy — is perhaps best embodied in the government bailout and subsequent bankruptcy of Wilson's old company, and of one of its longstanding competitors.
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 FAIRY TALE
By December 2008, years of decline had finally caught up with Chrysler and General Motors. Unlike Ford, which had moved aggressively to fix its longstanding problems — chiefly by shedding unprofitable subsidiaries and renegotiating labor agreements — GM and Chrysler were still plagued by incompetence and inefficiency.
Both automakers were burdened with labor contracts that undermined their flexibility and saddled them with massive retiree pension and health-benefit costs. For years, both companies had also been losing market share: Once-proud GM had lost $40 billion in 2007, and in 2008 alone saw its sales decline by 45%. Chrysler, meanwhile, was languishing under the inept management of Cerberus Capital, which had bought the company in the spring of 2007 from the German automaker Daimler. (Daimler had merged with Chrysler in 1998 only to see its new American acquisition become an unsustainable liability.) By 2008, Chrysler's market share had been declining precipitously for a decade, falling by more than 30% in that year alone.
Finally, the onset of the credit crunch and financial crisis in the fall of 2008 proved to be the companies' death knell. But though their fates seemed to be sealed, both automakers brazenly refused to make plans for bankruptcy filings. They assumed that the federal government would not allow them to suffer the same fate as most other poorly managed companies in America. So they pleaded for a federal bailout, arguing that Washington's failure to provide one would result in the companies' liquidation — in part precisely because the automakers' failure to prepare for bankruptcy filings would end up producing "disorderly" bankruptcies that, in turn, would make it difficult to keep the companies alive. And liquidation, they argued, would eliminate thousands of jobs at the companies themselves, not to mention thousands more at suppliers and dealers. It would also destroy the companies' underfunded retiree pension and health benefits and — because they were backed by the Pension Benefit Guaranty Corporation, a government agency that guarantees some private pension systems — might in turn foist those obligations on the taxpayer. With the economy already reeling from the financial crisis, the automakers insisted, the shock of massive auto-industry layoffs would be too much to take.
On December 11, 2008, the House of Representatives buckled under the automakers' demands, voting (largely along party lines) in favor of a $14 billion bailout. The next day, however, the Senate voted down the legislation. A week later, lame-duck President George W. Bush and Treasury Secretary Henry Paulson intervened. Announcing that the administration would offer the automakers loans with terms similar to the ones Congress had voted down, Bush gave GM and Chrysler three months to develop restructuring plans and prove they could become viable companies. To help the automakers through that phase (and a possible Chapter 11 bankruptcy), the administration extended them $17.4 billion from the Troubled Asset Relief Program, which had originally been set up to buy assets and equities from the financial sector in the wake of the mortgage crisis.
In March 2009, when the lifeline extended by the Bush administration had run out, President Obama stepped in. The administration forced out the CEO of General Motors, Rick Wagoner, and gave Chrysler 30 days to finalize a merger with the Italian automaker Fiat. In exchange, the companies received another (and even larger) round of government loans. In the end, almost $77 billion in TARP funds was diverted to GM and Chrysler.
But in spite of the generous loans, extensions, and second chances, the Obama administration finally concluded that the companies' restructuring plans were insufficient. In the spring of 2009, it directed both automakers to proceed into Chapter 11 bankruptcy — Chrysler filed on April 30, and GM on June 1. In both cases, bankruptcy involved creating new companies — the so-called "new Chrysler" and "new GM" — in which the federal government would have a significant stake, and to which the bulk of the assets of the original companies (including all of their plants, equipment, brands, and trademarks) would be sold. The original companies, meanwhile, would settle their obligations to creditors and shed those assets that would not be transferred to the new companies. Their shareholders would be all but wiped out.
The automakers' house-cleaning didn't take long; within two months of filing, each company had emerged from its bankruptcy. By the summer of 2009, the new General Motors was a somewhat smaller and leaner company, having shed about a third of its American work force. It was owned jointly by the federal government (which held 60% of the stock), the United Auto Workers union (with 17%), and the Canadian government (with 12% ownership). Chrysler, meanwhile, emerged through an alliance with Fiat, under which the new company was owned by the United Auto Workers (with a 55% share), Fiat (with 20%), the United States government (with 8%), and Canada (with 2%). (Both GM and Chrysler have significant operations and large work forces in Canada; the Canadian government, facing pressures similar to those exerted on lawmakers in the U.S., also contributed bailout funds — about $800 million for Chrysler and $2.4 billion for GM — hence its ownership stakes.)
The idea was for the companies to go public within a few months, at which point the U.S. government would sell most of its shares. GM did in fact go public in November 2010, raising about $20 billion in the biggest initial public offering in American history. Through the stock sale, the government's share in the company was reduced to about 30%. The new Chrysler has not yet gone public — indeed, the company reported a $200 million loss in the last quarter of 2010 — but industry analysts believe it will later this year.
To the Obama administration, and to many other champions of the auto bailout in Congress and the press, the story outlined here is one of extraordinary success. "Supporting the American auto industry required tough decisions and shared sacrifices, but it helped save jobs, rescue an industry at the heart of America's manufacturing sector, and make it more competitive for the future," President Obama said when the new General Motors went public last November. Then-speaker of the House Nancy Pelosi echoed his view, arguing: "In the midst of a severe recession, congressional Democrats and President Obama took difficult emergency action to rescue American auto companies and strengthen critical pillars of our manufacturing sector, while protecting taxpayers."
Of course, this "success narrative" is based on a particular reading of the events surrounding the bailout. According to that reading, the nature of the '08 financial crisis — as well as the economic importance of the auto industry — meant that the government simply could not let GM and Chrysler go under. But at least the unprecedented cooperation between the government and the automakers was undertaken in a deliberate, careful way — using the government's special authority to contend with the economic crisis in order to guide the companies through an orderly re-organization (rather than the dreaded chaotic collapse). As a result, the companies were saved, and now they have a chance to thrive again.
Unfortunately, every part of this reading of events is wrong.
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