Crony Capitalism in America 2008-2012, Chapter 17, Big Labor Rakes It in: The Auto Bail-out

By Hunter Lewis on January 6, 2014



Chapter 17 of Hunter Lewis’s new book

Like the Stimulus Act of 2009, the auto bailout of the same year is by now familiar territory. But there are many aspects of it which are little known and worth recounting.


Why did the George W. Bush administration pour $17.4 billion into rescuing General Motors and Chrysler? 241 Why did the Obama administration then increase the total to $85 billion?242 The decision was politically unpopular at the time. The idea of taxing school teachers earning $25 an hour or borrowing from China to rescue $60 an hour unionized auto workers did not seem fair, much less economically defensible. Economist Timothy Kehoe, a self-described “lifelong Democrat” and “Obama voter,” remarked at the time:” It was scandalous. . . . Unproductive firms need to die. . . .”243
The calculus of both administrations was political, not economic. General Motors and Chrysler workers were located primarily in six Midwestern presidential election “swing” states, the states that typically decide the election. In addition, in the case of President Obama, the United Auto Workers Union was a key political ally.


Why were General Motors and Chrysler failing? A principal factor was the uneconomic wages, healthcare
plans, and pensions negotiated with the United Auto Workers, which would ironically end up owning the companies along with the US government. Another often overlooked factor was the policies of the US government itself. For example, CAFE laws required that US car manufacturers meet minimum miles per gallon of fuel standards. But the law blocked manufacturers from bringing in the smaller, more fuel efficient cars they made abroad in order to meet the mandated domestic fleet standard. The companies were forced to build small cars in US plants, which they could not do economically because of labor costs. Meanwhile foreign companies manufacturing in the US without unionized employees had no trouble meeting the CAFE rules.244


In its auto rescue, the Obama Administration made a deliberate decision to ignore bankruptcy law. General Motors and Chrysler had filed for bankruptcy. The shareholders were already wiped out. Normally assets would have been sold off with proceeds going first to secured lenders (those with specific collateral behind the loan) and then to unsecured creditors of all sorts. The United Auto Workers, as an unsecured creditor, would have gotten little. And in any case, union contracts are usually voided in a bankruptcy proceeding.



The Obama Administration changed all the rules. Consumer warranty contracts from the past were voided,245 but union contracts were not. Tax losses from the past, usually extinguished in bankruptcy, were carried forward into the new General Motors and Chrysler. This meant that the new companies would not have to pay taxes for many years into the future. The United Auto Workers received a new note for $4.6 billion (45% of its financial claim) against Chrysler and 55% of the company. In the case of General Motors, the union got $10.2 billion in cash (about half its financial claim) and 39% of the company, with the government retaining the rest of the new shares.


Secured creditors of Chrysler and General Motors got about 28% of their money back, much less than they would have received if the union had not received such unprecedented and seemingly illegal special treatment. Why did they not sue? In the first place, many of these creditors were banks that were also being bailed out by the government or under the thumb of its regulators. They were hardly in a position to refuse consent. In the second place, under the “sovereign immunity” doctrine, the government can only be sued when Congress has passed legislation allowing it.
The president also condemned recalcitrant unsecured creditors as “speculators,”246 and, in the case of some of them, seemed to be threatening regulatory retaliation.


Who were these people? Some of them were Wall Street firms, although often these firms held the bonds on behalf of average Americans. About 20% of all the General Motors bonds were directly owned by “mom-and-pop” investors who had entrusted their retirement savings to a company they thought they could trust. For example, there was David Tuckerman, 84, of Arlington, VA who lost $20,000 of retirement savings; David Talbot, 24, a camp counselor who lost what had been a $5,000 gift from his grandfather; Bill Zastrow, 58, a single father who lost $240,000 in college and retirement savings; and Richard and Willa Woodard, a retired couple who lost most of their retirement savings, $170,000.247 How could the US government divert money to a major political ally, the union, at the expense of small investors or warranty owners, the people who had trusted GM enough to buy a bond or a car from it?


All of this amounted to what legal scholars call a “sub rosa” reorganization, which is forbidden,248 as well as a violation of the most fundamental tenets of bankruptcy law. It also violated property rights, some of the most basic rights under Common Law. As commentator Lawrence Kudlow noted, it essentially replaced “the rule of law” with “political decisions.”249


In addition to the bail-out itself, the federal government supported the new union-owned companies innumerous ways. It spent $17.2 billion rescuing General Motors Acceptance Corp, the financing arm of the company, and spun it out as an independent company under the name Ally, with General Motors retaining 6.7% of the shares.250 It shifted federal purchase of cars to favor a new electric hybrid, the Volt, made by General Motors, and provided a $7,500 federal tax credit ($2,000 more if you got a more powerful charger) to any consumer buying one. And, very importantly, the US Federal Reserve both directly supported the General Motors and Chrysler finance arms (along with other auto companies’ finance arms, including foreign firms 251) and kept interest rates at vanishing levels, which made car financing much easier.


General Motor’s main parts supplier, Delphi, had been in bankruptcy long before the auto makers. President Obama’s Auto Task Force handed Delphi over without auction or competitive bidding to a private investment firm affiliated with Platinum Equity, reportedly because Platinum had close ties with the United Auto Workers as well as to the administration.252 What happened to the pensions of 20,000 non-unionized Delphi workers? Unlike United Auto Workers health plans and pensions, they largely disappeared.253



General Motors also had some non-union workers and plants. As the company restructured, it was these plants that were shut down, even the highly productive non-union plant in Moraine, Ohio, a suburb of Dayton. Under terms of the reorganization, workers at this location were barred from transfer to other plants.254 And as business improved, it was union plants, not non-union, that were opened. The message was clear: a worker foolish enough not to have voted for United Auto Workers’ representation had no rights and no future.


The Obama Administration also fired the chief executive of General Motors, named his successor, and took majority ownership of the company. Would General Motors executives now become a reliable source of campaign donations? At first, no. But by 2010, the donations were starting to flow to politicians again, despite the company’s new status as a ward of the government.255


The donations were already flowing from Evercore Partners, an investment firm that received $64 million in fees for arranging a government bail-out that would have happened anyway. Roger Altman, a former assistant treasury secretary under President Clinton and key Evercore principal, was a close ally of the president and bundler for his campaign. His partner, Ralph Schlosstein, gave a $38,500-a-plate fundraiser for the president and raised $2.1 million for the president and the Democratic National Committee.256


At about the same time, the Treasury Department issued a press release stating that “General Motors
Repays Treasury Loan in Full.”257 The company’s new CEO, Ed Whitacre, restated this in a Wall Street Journal article: “We have repaid our government loan, in full, with interest, five years ahead of the originalschedule.”258 The message was repeated in a television commercial. But as columnist George Will noted, the claim was “rubbish.”259 The truth was that General Motors had repaid $6.7 billion, and had done so with other funds received from the government, a move that Senator Charles Grassley (R-Iowa) called the “TARP money shuffle.”260


A little later in 2010, the new General Motors prepared an offering document for a sale of shares to the public. The very last item on a list of “risk factors” was notice that, because the company was majority owned by the government, the offering would be largely exempt from federal and state securities law, including anti-fraud laws. If the prospectus was misleading, as the company’s earlier claim of loan repayment was, the buyer would not be able to sue, something completely unprecedented in modern stock offerings.261 Another major risk factor for any buyer was the quality of the loans the company was making to sell its cars. Many of the sales were being made to subprime borrowers who might or might not be able to make the payments. Within a year, the company’s new lending arm, ResCap, had itself filed for bankruptcy, 262 the new GM share price had fallen 40%, and Forbes was openly wondering if the whole company was headed for another bankruptcy.263


Two of the underwriters for the 2010 GM stock issue were identified simply as ICBC and CICC. These were a Chinese state-owned bank and a Chinese partly state-owned investment bank.264 Evidently the US government, one of the sellers, and the United Auto Workers, another principal seller, hoped to sell shares in China. The United Auto Workers was in fact able to sell a third of its shares, assisted by a promise of the government not to sell any more shares for six months after the initial sale, even though the Union was free to go on selling as it wished.265


By 2012, the US government bailed-out General Motors seemed to be particularly focused on China, where sales had been strong. Company executive Dan Akerson said in Beijing that “one of our aims is to help grow a new generation of automotive engineers, designers, and leaders right here in China.” The company had already invested $7 billion in China, $1 billion in Mexico, and planned to invest another $1 billion in the kleptocratic economy of Russia.266


There was not anything particularly surprising about this. Right at the end of the US presidential campaign in 2012, Chrysler, having been bailed out by the US government but now an Italian company, hinted it might move the production of Jeeps, the prototypically American vehicle, from Ohio to China.267 The Romney campaign pounced on this and ran an ad about it in Ohio, where one in eight jobs are connected to the auto industry.268 The ad backfired because Chrysler promptly denied the story and the press claimed it was all a fabrication. The company then gave its employees election day off to be sure they voted for the candidate who had saved their jobs269. Not long after came the company announcement that it was indeed thinking of moving some Jeep production to China.


The US government also tried to help General Motors and Chrysler in a variety of other ways. It kept interest rates extremely low, which helped finance car sales. It launched the cash for clunkers program. This involved the government buying about 750,000 old vehicles, which were either incinerated, which was worse for the environment than continuing to run the old cars, or turned into scrap and sold to China. An administration that had stressed its commitment to environmentalism allowed no recycling of parts. The program did increase US car sales, although many of the new sales went to unqualified buyers, which just led directly to repossession. Those whose cars were repossessed found that used cars were now scarce, and much higher in price if available at all. So many people lost their old transportation and were not able to replace it.270



By 2013, the Obama administration had reverted to the usual government stance of raising new car prices as well. For example, the Department of Transportation decided to mandate rear-view camera and video displays for all cars, at an estimated cost of $2.7 billion,271 but delayed the rule for several years. It was put back on the front burner after the 2012 election and was expected to be issued sometime in 2013. This rule might make cars safer. But it would also help to drive the cost of cars beyond the means of low income earners. It would also push low income buyers further into debt or into smaller, cheaper foreign cars.


Some people will no doubt justify the seemingly illegal actions that the US government took to bail out the United Auto workers and its rich store of swing state voters by arguing that unions are on the side of the “little guy” and provide important protections against the selfish actions of predatory corporations. But they should look more closely at what and whom they are supporting. Since the 1930’s, union members have generally been more privileged than other workers. For example, the unionized office workers at Southern California ports in 2012 rejected a management offer of $190,000 a year, which included a no layoff provision. They did so even as their strike was tying up US commerce and creating economic losses estimated at $1 billion per day.272


It is usually taken for granted that unions raise worker pay and, and by so doing, reduce income inequality and poverty, but none of this is true. Economists have long acknowledged that union wage gains do not come at the expense of owner profits, taken as a whole. They come at the expense of other, non-unionized workers. To see why this is true, we need to realize that unions are government-protected monopolies. That is, they seek to create a monopoly of the labor force for any given industry. Like any monopoly, they may be able to raise the price (in this case of labor) in one industry or industry segment, but as the price rises, employers naturally respond by reducing the numbers hired. The workers not hired because of monopoly prices increase the supply of labor in other industries, which reduces wages there. The result is not an increase in workers’ wages overall, just an increase for some and a decrease for others.


Even workers who seem to benefit from the labor monopoly in a given industry may be enjoying illusory gains. The rich wages paid by General Motors and Chrysler over the years not only led to fewer and fewer hires; it also meant higher and higher car prices. These car prices in turn attracted the foreign competition that eventually destroyed the unionized auto makers. In addition, it meant that US workers had to pay higher prices for their own cars. The result of Detroit union gains in the end was impoverishment for everyone, even the union workers.

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