Would You Buy A Used Car Industry From This Man?

Let’s turn the clock back to the 2008 campaign and ask the question: If Barack Obama had run for office promising to deliver one-third of the Big Three automakers to the unions and drop another one-third on the backs of taxpayers, would people have approved? Yet, remarkably, that is what is in the offing as a result of the Administration’s policies.

This is madness.

No serious observer of the situation believes that the government should own and run a U.S. auto company. The potential for political meddling in car design, vehicle pricing, employment policies, and plant locations is overwhelming. The actual meddling would be devastating to the industry. The Administration continues to claim that it does not want to run automobile companies on a day-to-day basis. The protestations notwithstanding, the White House has fired GM CEO Rick Waggoner, re-populated the Board of Directors, and rejected one plan to restructure. That sounds like day-to-day management.

This is not fair.

How can creditors negotiate a fair deal against the power of the White House? How does Ford compete when GM and Chrysler are benefiting from their political capital?

This is mystifying public policy.

What will we have gotten for the government involvement? When the feds launched their intervention last fall, one argument (not widely believed) was that the only real problem was that credit markets were not permitting customers to get auto loans and that the government loans would compensate. Shortly thereafter it was acknowledged that the companies were simply uncompetitive and would need to restructure in order to compete effectively.

The need to restructure is the fundamental reason why firms seek Chapter 11 bankruptcy protection. In this case, however, bailout advocates have sought to avoid bankruptcy, variously arguing that it would impose too much distress on auto suppliers, Michigan and surrounding states, autoworkers, or creditors.

Instead, GM has announced that it will discontinue production of the Pontiac brand and cut 21,000 factory jobs. GM said it would speed up six more factory closings that were already announced and cut more salaried jobs on top of the 3,400 eliminated in the U.S. last week. The restructuring will leave GM with 34 factories (compared with 47 at the end of 2008) and 3,605 dealers (compared with 6,246 at present). It will swap debt-for equity, offering 225 shares of common stock for every $1,000 in notes held by bondholders in order to eliminate most of the $27 billion in unsecured debt. The United Auto Workers would get stock instead of one-half of the $20 billion the company is supposed to pay into a union-run trust that pays retiree health expenses. At the end of the day, current common stockholders would own only 1 percent of the company.

This doesn’t sound very different than bankruptcy. Why not just use it and get the government out of the auto business?

This tells us a lot about the Administration’s philosophy.

The Administration’s approach puts it squarely in the position of picking winners and losers in restructuring. It permits the White House to dictate on political criteria in a way that market-based solutions would not. It is entirely consistent with using tax policy to drive income redistribution, energy policy to reward favored supplies and technologies, and infrastructure policy to support the states and localities of choice. Political connections will replace entrepreneurial spirit and risk-taking as the key ingredient for economic advancement.