The Real Story Behind the Chrysler Bankruptcy
If you worry about the abuse of executive power and declining respect among elected officials for the rule of law, you should watch this eloquent illumination of what really went down in the Chrysler bankruptcy earlier this year. The speaker is Richard Mourdock, Treasurer of the state of Indiana. The setting is a Cato Institute policy forum on October 15 about the “sordid details of the Bush/Obama auto industry intervention.”
As state treasurer, Mourdock is the person responsible for investment decisions concerning Indiana’s state employee pension funds, some of which owned a small share of Chrysler’s $6.9 billion in secured debt and some of which opposed the administration’s offer of $.29 on the dollar for that debt. Though these small secured holders were publicly castigated by President Obama as “unpatriotic” and unwilling to sacrifice for the greater good, Mourdock led the effort to stop the “sale” of Chrysler all the way to the U.S. Supreme Court.
Mourdock’s presentation gives a flavor for the tactics employed by the Obama administration to “encourage” senior, priority creditors to back off their claims so that chosen parties could take priority—tactics that included backroom reminders that some of those creditors had received and might seek more TARP funding, threats of bringing the full weight and measure of the White House press office to bear down on dissenters, public condemnation, and other forms of arm-twisting most Americans would find unseemly for a U.S. presidential administration.
Filed under: General; Government and Politics; Regulatory Studies; Tax and Budget Policy; Trade and Immigration
U.S. Cutting Pay for Bailed Out Company Executives
According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:
NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.
But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.
This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.
I debate this further on CNBC:
C/P The Hill
Filed under: Finance, Banking & Monetary Policy; General
Eyewitness to Government’s Robbery of Chrysler Creditors
Further to Ilya Shapiro’s post this morning, let me also point you to a concise chronology of events culminating in the government’s robbery of Chrysler creditors.
The story is that of Richard Mourdock, Treasurer of the State of Indiana and the man responsible for stewardship of the state’s pension funds, some of which were victimized by the Obama administration’s pre-packaged and then forced-fed bankruptcy deal for Chrysler. I strongly urge you to read Mr. Mourdock’s testimony, which is at once revealing, sobering, compelling and, regrettably, a frightening sign of the times.
Mourdock will be speaking on this very topic at Cato, along with bankruptcy law expert David Skeel, on Thursday, October 15 at noon. Reserve your seat now.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Law and Civil Liberties
The Government Robbed Chrysler Creditors
In January 2009, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt. The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.
When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler. Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.
Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity. We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors.
The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority. Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets.
The Court will be deciding whether to hear the case later this fall. Thanks very much to Cato legal associate Travis Cushman for his help with the brief.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Law and Civil Liberties
So Much for Making Money on the Bailout
The federal government is unlikely to recoup all of the billions of dollars that it has invested in General Motors and Chrysler, according to a new congressional oversight report assessing the automakers’ rescue.
The report said that a $5.4 billion portion of the $10.5 billion owed by Chrysler is “highly unlikely” to be repaid, while full recovery of the $50 billion sunk into GM would require the company’s stock to reach unprecedented heights.
“Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount,” according to the report, which is scheduled to be released Wednesday.
Well, it’s only money. And with the taxpayers facing more than $100 trillion worth of unfunded liabilities, what’s a few more wasted dollars?!
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Our Tax Dollars Are Being Used to Lobby for More Government Handouts
The First Amendment guarantees our freedom to petition the government, which is one of the reasons why the statists who wants to restrict or even ban lobbying hopefully will not succeed. But that does not mean all lobbying is created equal. If a bunch of small business owners get together to lobby against higher taxes, that is a noble endeavor. If the same group of people get together and lobby for special handouts, by contrast, they are being despicable. And if they get a bailout from the government and use that money to mooch for more handouts, they deserve a reserved seat in a very hot place.
This is not just a hypothetical exercise. The Hill reports on the combined $20 million lobbying budget of some of the companies that stuck their snouts in the public trough:
Auto companies and eight of the country’s biggest banks that received tens of billions of dollars in federal bailout money spent more than $20 million on lobbying Washington lawmakers in the first half of this year. General Motors, Chrysler and GMAC, the finance arm of GM, cut back significantly on lobbying expenses in the period, spending about one-third less in total than they had in the first half of 2008. But the eight banks, the earliest recipients of billions of dollars from the federal government, continued to rely heavily on their Washington lobbying arms, spending more than $12.4 million in the first half of 2009. That is slightly more than they spent during the same period a year ago, according to a review of congressional records.
…big banks traditionally are among the most active Washington lobbying interests in the financial industry, and the recession has done little to dent their spending. …Since last fall, companies receiving government funds have argued that none of the taxpayer money they were receiving was being spent on lobbying.
…American International Group, the insurance firm crippled by trades in financial derivatives that received roughly $180 billion in bailout commitments, closed its Washington lobbying shop earlier this year. AIG continues to spend money on counsel to answer requests for information from the federal government, but the firm said it does not lobby on federal legislation.
The most absurd part of the story was the companies claiming that they did not use tax dollar for lobbying. I guess the corporate bureaucrats skipped the classes where their teachers explained that money is fungible.
The best part of the story was learning that AIG closed its lobbying operation, though that does not mean much since AIG basically now exists as a subsidiary of the federal government. The most important message (which is absent from the story, of course) is that the real problem is that government is too big and that it intervenes in private markets. Companies would not need to lobby if government left them alone and/or did not offer them special favors. Indeed, that was the key point of my video entitled, “Want Less Corruption: Shrink the Size of Government.”
Intervention Begets Intervention, Which Begets…
The logic in Washington is ineluctable. If government provides money, then it needs to impose regulations. If the government takes ownership, then it must provide management.
Bail out the banks. Set bankers’ salaries. Bail out the insurers. Decide on corporate bonuses.
And if the government takes over the automakers, then it should run the automakers. That, of course, means deciding who can be dealers.
Now that the Obama administration has spent billions of dollars on the bailouts of General Motors and Chrysler, Congress is considering making its first major management decision at the automakers.
Under legislation that has rapidly gained support, GM and Chrysler would have to reinstate more than 2,000 dealerships that the companies had slated for closure.
The automakers say the ranks of their dealers must be thinned in order to match the fallen demand for cars. But some of the rejected dealers and their Capitol Hill supporters argue that the process of selecting dealerships for closure was arbitrary and went too far.
Since federal money has been used to sustain the automakers, they say Congress has an obligation to intervene.
At a gathering of dozens of dealers who came to Capitol Hill yesterday to lobby their representatives, House Majority Leader Steny H. Hoyer (D-Md.) and several other congressmen spoke in support of the dealers. More than 240 House members have signed onto the bill, supporters said.
“We are going to stand with them for as long as it takes,” Hoyer told an approving crowd.
What is next? Congress deciding the prices that should be charged for autos? The accessories to be offered? The colors cars should be painted?
I have no idea who should or should not be an auto dealer. But I do know that it is a decision which should not be made in Washington, D.C.
Filed under: Government and Politics; Regulatory Studies; Tax and Budget Policy
The Failure of Do-Nothing Policies
A news story from today in a slightly alternate universe:
Jobless Rate at 26-Year High
Employers kept slashing jobs at a furious pace in June as the unemployment rate edged ever closer to double-digit levels, undermining signs of progress in the economy, and making clear that the job market remains in terrible shape.
The number of jobs on employers’ payrolls fell by 467,000, the Labor Department said. That is many more jobs than were shed in May and far worse than the 350,000 job losses that economists were forecasting.
Job losses peaked in January and had declined every month until June. The steep losses show that even as there are signs that total economic activity may level off or begin growing later this year, the nation’s employers are still pulling back.
White House press secretary Robert Gibbs said, “President Obama proposed a $787 billion stimulus program to get this country moving again. He tried to save the jobs at GM and Chrysler. But the do-nothing Republicans filibustered and blocked that progressive legislation, and these are the results.”
House Speaker Nancy Pelosi said at a press conference, “We begged President Bush to save Fannie Mae, Merrill Lynch, Bank of America, AIG, the rest of Wall Street, the banks, and the automobile industry. We begged him to spend $700 billion of taxpayers’ money to bail out America’s great companies. We begged him to ignore the deficit and spend more money we don’t have. But did he listen? No, he just sat there wearing his Adam Smith tie and refused to spend even a single trillion to save jobs. And now unemployment is at 9.5 percent. I hope he’s happy.”
Democrats on Capitol Hill agreed that the “do-nothing” response to the financial crisis had led to rising unemployment and a sluggish economy. If the Bush and Obama administrations had been willing to invest in American companies, run the deficit up to $1.8 trillion, and talk about all sorts of new taxes, regulations, and spending programs, then certainly the economy would be recovering by now, they said.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy; Trade and Immigration
Fed to BoA: ‘We Will Not Leave You in the Lurch’
Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.
While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.
One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”
If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.
One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.
While BoA has been saved, it appears that the rule of law has been “left in the lurch.”
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Cash for Clunkers Lesson: How to Use the $$ to Buy a Gas Guzzler
My son’s station car is an old Ford Explorer AWD which, despite being a V-6, was rated at about 15 mpg. Approaching 100,000 miles, the SUV’ s resale value is very low.
The House approved a bill to give him a $3,500 voucher to buy a car that is supposed to get only 18 mpg, or $4,500 if it gets 20 mpg. Only 18-20 mpg? That’s not moving us much closer to President Obama’s pie-in-the-sky 35.5 mpg goalpost is it?
Consider how easy it would be to game this giveaway program by using that $4,500 voucher to buy a big SUV or V-8 muscle car.
First of all, with Chrysler and GM dealerships folding, it should be easy to buy a mediocre Chevy Cobalt or Dodge Caliber for about $10,000 more than the voucher.
What you do next is sell that boring econobox, even if you end up with $1,000 less than you paid — that still leaves you with $3,500 of free money, courtesy of taxpayers.
As this process unfolds, the flood of resold small cars will make it even harder for GM, Chrysler and Ford dealers to get a decent price for small cars, because of added competition from new cars being resold as used.
That’s their problem, not yours.
So, take the $9,000 net from reselling the crummy little car plus the $4,500 from Uncle Sam. Then use that $13,500 to make a big down payment on a used Cadillac Escalade, Toyota Tundra pickup or Corvette.
File this under “unintended consequences” (my own file is running out of space).
Filed under: Energy and Environment; Government and Politics; Regulatory Studies; Tax and Budget Policy
Indiana: Defender of “the Rule of Law”
While the majority of Chrysler’s senior creditors sacrificed their fiduciary duties and caved into political pressure in accepting the Obama Administration’s pre-packaged bankruptcy of Chrysler, a small group of state pension funds in Indiana has challenged the Obama plan and is asking the Supreme Court to review said plan. As in the 1930s, the protection of contractual rights, one of the most basic pillars of a free society, along with the rule of law, is now in the hands of the Supreme Court.
As discussed in today’s Washington Post, these pension funds believe their rights were infringed by the Administration’s placing of junior creditors in a preferred situation to senior creditors. It doesn’t take Ms. Manners to remind us that cutting in line, whether in traffic, at the grocery store, or in a bankruptcy, is plain rude. To have the government re-order the line for you is even worse.
To re-build confidence in our markets, trust in our institutions must be re-stored. Not simply in our private institutions, but also in our government. If players believe the game is going to be rigged, fewer will be willing to play. And while the Administration has portrayed Chrysler’s senior creditors as nothing more than greedy speculators, the Indiana request exposes that myth. President Obama should clearly articulate why retired state employees, such as teachers and firefighters, should have their pension funds raided solely for the benefit of the auto unions. Here’s to hoping Indiana goes all the way in this Court.
Should You Vote on Keeping Your Local Car Dealership?
There are lots of reasons Washington should not bail out the automakers. Whatever the justification for saving financial institutions — the “lifeblood” of the economy, etc., etc. — saving selected industrial enterprises is lemon socialism at its worst. The idea that the federal government will be able to engineer an economic turnaround is, well, the sort of economic fantasy that unfortunately dominates Capitol Hill these days.
One obvious problem is that legislators now have a great excuse to micromanage the automakers. And they have already started. After all, if the taxpayers are providing subsidies, don’t they deserve to have dealerships, lots of dealerships, just down the street? That’s what our Congresscritters seem to think.
Observes Stephen Chapman of the Chicago Tribune:
The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.
That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller, D-W.Va., led the way, asserting, “I honestly don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves.”
Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn’t rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.
The Constitution guarantees West Virginia two senators, and Rockefeller seems to think it also guarantees the state a fixed supply of car sellers. “Chrysler is eliminating 40 percent of its dealerships in my state,” he fumed, “and I have heard that GM will eliminate more than 30 percent.” This development raises the ghastly prospect that “some consumers in West Virginia will have to travel much farther distances to get their cars serviced under warranty.”
Dealers were on hand to join the chorus. “To be arbitrarily closed with no compensation is wasteful and devastating,” said Russell Whatley, owner of a Chrysler outlet in Mineral Wells, Texas.
Lemon socialism mixed with pork barrel politics! Could it get any worse? Don’t ask: after all, this is Washington, D.C.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
Week in Review: A Speech in Cairo, an Anniversary in China and a U.S. Bankruptcy
Obama Speaks to the Muslim World
In Cairo on Thursday, President Obama asked for a “new beginning between the United States and Muslims around the world,” and spoke at some length on the Israeli-Palestinian conflict, Iran, Iraq, and Afghanistan. Cato scholar Christopher Preble comments, “At times, it sounded like a state of the union address, with a litany of promises intended to appeal to particular interest groups. …That said, I thought the president hit the essential points without overpromising.”
Preble goes on to say:
He did not ignore that which divides the United States from the world at large, and many Muslims in particular, nor was he afraid to address squarely the lies and distortions — including the implication that 9/11 never happened, or was not the product of al Qaeda — that have made the situation worse than it should be. He stressed the common interests that should draw people to support U.S. policies rather than oppose them: these include our opposition to the use of violence against innocents; our support for democracy and self-government; and our hostility toward racial, ethnic or religious intolerance. All good.
David Boaz contends that there are a number of other nations the president could have chosen to deliver his address:
Americans forget that the Muslim world and the Arab world are not synonymous. In fact, only 15 to 20 percent of Muslims live in Arab countries, barely more than the number in Indonesia alone and far fewer than the number in the Indian subcontinent. It seems to me that Obama would be better off delivering his message to the Muslim world somewhere closer to where most Muslims live. Perhaps even in his own childhood home of Indonesia.
Not only are there more Muslims in Asia than in the Middle East, the Muslim countries of south and southeast Asia have done a better job of integrating Islam and modern democratic capitalism…. Egypt is a fine place for a speech on the Arab-Israeli conflict. But in Indonesia, Malaysia, India, or Pakistan he could give a speech on America and the Muslim world surrounded by rival political leaders in a democratic country and by internationally recognized business leaders. It would be good for the president to draw attention to this more moderate version of Islam.
Tiananmen Square: 20 Years Later
It has been 20 years since the tragic deaths of pro-democracy protesters in Tiananmen Square in June 1989, and 30 years since Deng Xiaoping embarked on economic reform in China. Cato scholar James A. Dorn comments, “After 20 years China has made substantial economic progress, but the ghosts of Tiananmen are restless and will continue to be so until the Goddess of Liberty is restored.”
In Thursday’s Cato Daily Podcast, Dorn discusses the perception of human rights in China since the Tiananmen Square massacre, saying that many young people are beginning to accept the existence of human rights independent of the state.
A few days before the anniversary, social media Web sites like Twitter and YouTube were blocked in China. Cato scholar Jim Harper says that it’s going to take a lot more than tanks to shut down the message of freedom in today’s online world:
In 1989, when a nascent pro-democracy movement wanted to communicate its vitality and prepare to take on the state, meeting en masse was vital. But that made it fairly easy for the CCP to roll in and crush the dream of democracy.
Twenty years later, the Internet is the place where mass movements for liberty can take root. While the CCP is attempting to use the electronic equivalent of an armored division to prevent change, reform today is a question of when, not if. Shutting down open dialogue will only slow the democratic transition to freedom, which the Chinese government cannot ultimately prevent.
Taxpayers Acquire Failing Auto Company
After billions of dollars were spent over the course of two presidential administrations to keep General Motors afloat, the American car company filed for bankruptcy this week anyway.
Last year Cato trade expert Daniel J. Ikenson appeared on dozens of radio and television programs and wrote op-eds in newspapers and magazines explaining why automakers should file for bankruptcy—before spending billions in taxpayer dollars.
Which leaves Ikenson asking one very important question: “What was the point of that?”
In November, GM turned to the federal government for a bailout loan — the one final alternative to bankruptcy. After a lot of discussion and some rich debate, Congress voted against a bailout, seemingly foreclosing all options except bankruptcy. But before GM could avail itself of bankruptcy protection, President Bush took the fateful decision of circumventing Congress and diverting $15.4 billion from Troubled Asset Relief Program funds to GM (in the chummy spirit of avoiding tough news around the holidays).
That was the original sin. George W. Bush is very much complicit in the nationalization of GM and the cascade of similar interventions that may follow. Had Bush not funded GM in December (under questionable authority, no less), the company probably would have filed for bankruptcy on Jan. 1, at which point prospective buyers, both foreign and domestic, would have surfaced and made bids for spin-off assets or equity stakes in the “New GM,” just as is happening now.
Meanwhile, the government takeover of GM puts the fate of Ford Motors, a company that didn’t take any bailout money, into question:
Thus, what’s going to happen to Ford? With the public aware that the administration will go to bat for GM, who will want to own Ford stock? Who will lend Ford money (particularly in light of the way GM’s and Chrysler’s bondholders were treated). Who wants to compete against an entity backed by an unrestrained national treasury?
Ultimately, if I’m a member of Ford management or a large shareholder, I’m thinking that my biggest competitors, who’ve made terrible business decisions over the years, just got their debts erased and their downsides covered. Thus, even if my balance sheet is healthy enough to go it alone, why bother? And that calculation presents the specter of another taxpayer bailout to the tunes of tens of billions of dollars, and another government-run auto company.
Labor’s Waxing Political Influence
It has long been recognized that many capitalists are the greatest enemies of capitalism. They want free enterprise for others, not themselves.
Unfortunately, organized labor tends to be even more statist in orientation. Unions now routinely lobby for government to give them what they cannot get in the marketplace.
Labor influence is greatest in the public sector. And as government’s power has expanded during the current economic crisis, so has the influence of unions. Observes Steve Malanga in the Wall Street Journal:
Across the private sector, workers are swallowing hard as their employers freeze salaries, cancel bonuses, and institute longer work days. America’s employees can see for themselves how steeply business has fallen off, which is why many are accepting cost-saving measures with equanimity — especially compared to workers in France, where riots and plant takeovers have become regular news.
But then there is the U.S. public sector, where the mood seems very European these days. In New Jersey, which faces a $3.3 billion budget deficit, angry state workers have demonstrated in Trenton and taken Gov. Jon Corzine to court over his plan to require unpaid furloughs for public employees. In New York, public-sector unions have hit the airwaves with caustic ads denouncing Gov. David Paterson’s promise to lay off state workers if they continue refusing to forgo wage hikes as part of an effort to close a $17.7 billion deficit. In Los Angeles County, where the schools face a budget deficit of nearly $600 million, school employees have balked at a salary freeze and vowed to oppose any layoffs that the board of education says it will have to pursue if workers don’t agree to concessions.
Call it a tale of two economies. Private-sector workers — unionized and nonunion alike — can largely see that without compromises they may be forced to join unemployment lines. Not so in the public sector.
Government unions used their influence this winter in Washington to ensure that a healthy chunk of the federal stimulus package was sent to states and cities to preserve public jobs. Now they are fighting tenacious and largely successful local battles to safeguard salaries and benefits. Their gains, of course, can only come at the expense of taxpayers, which is one reason why states and cities are approving tens of billions of dollars in tax increases.
The government’s increased power over the economy also gives organized labor a new hook to lobby for more special interest privileges. For instance, the AFL-CIO is arguing that the federal bailout of the auto industry should bar the companies from moving factories overseas.
Explains the union federation:
The pundits and politicians inside the Washington Beltway don’t get: If the United States continues to send its manufacturing jobs [1] overseas—as [2] General Motors and Chrysler are now proposing—the result will be more low-income U.S. families.
So today, workers, economists, academics and business and union leaders, fresh from the “[3] Keep It Made in America” bus tour through the nation’s heartland, brought that message to the policymakers’ doorstep as part of a teach-in on Capitol Hill.
The 11-day, 34-city bus tour showcased the ripple effect on communities of the lost jobs in manufacturing. ([4] See video.) Today, during the teach-in, those who took part brought the stories they heard along the tour and presented principles for revitalizing the auto industry to members of Congress and the press.
Labor officials have been making similar arguments about bank lending. If you got bailed out by Washington, then you have an obligation to keep funding bankrupt concerns. Never mind getting paid back, and paying back the taxpayers.
Markets are resilient, but can survive only so much political interference. If the American people aren’t careful, they might eventually find themselves living in an economy more appropriate for Latin America than North America.
An Overdue Reckoning in the Auto Sector
Bloomberg reports:
General Motors Corp., facing a probable bankruptcy filing by June 1, is telling 1,100 “underperforming” U.S. dealers they will be terminated as the automaker starts shrinking its retail network.
Most of the closings will occur by October 2010, and none are happening now, Detroit-based GM said today. The targeted outlets will have until the end of the month to appeal the decisions, GM said, without specifying the stores on the list.
The shutdowns are the biggest U.S. automaker’s first step toward paring domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010.
To be sure, it is a very sad day for thousands of workers and businesses around the country. But we’re in the midst of a deep recession, which may be nowhere deeper than in the auto sector. Demand for cars and light trucks has absolutely tanked, which means the economy has an excess supply of inventory, productive capacity, and retail capacity.
“Gangster Government” at Work
With the Obama administration preferring to rely on politics rather than the law to “fix” the auto industry, bondholders have discovered that the new politics of this administration is quite a bit more brutal than the old politics practiced by the Bush administration.
Henry Payne and Richard Burr write of “gangster government” using not just demagogic public attacks on greedy bondholders but apparent threats of regulatory sanction to get its way in bankruptcy court. They explain:
The holdout debtholders sought the refuge of the courts, where decades of bankruptcy law promised that secured lenders would receive just compensation for their investment. But then Obama called in his fixers.
In his April 30 news conference, Obama singled out Chrysler’s self-described “non TARP lenders” as “speculators” who sought to imperil Chrysler’s future for their own benefit. “I do not stand with them,” Obama thundered. “I stand with Chrysler’s employees and their families and communities. . . . (not) those who held out when everybody else is making sacrifices.” Michigan Democratic allies like Sen. Debbie Stabenow and Rep. John Dingell piled on, calling the lenders “vultures.”
Then, on Detroit radio host Frank Beckmann’s show May 1, a lawyer for the lenders, Tom Lauria, chillingly revealed how “one of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”
Lauria later confirmed the threats came from Rattner and that the target was Perella Weinberg, which had suddenly withdrawn its opposition after the president’s April 30 press conference.
The White House denied the threats, but Business Insider subsequently reported that “sources familiar with the matter say that other firms felt they were threatened as well. None of the sources would agree to speak except on the condition of anonymity, citing fear of political repercussions.”
“The sources, who represent creditors to Chrysler,” continued the Insider story, “say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler. One person described the administration as the most shocking ‘end justifies the means’ group they have ever encountered. . . . Both were voters for Obama in the last election.”
The idea of the White House–with the IRS and SEC at its disposal–threatening investment firms should have sent off alarm bells in America’s newsrooms. Inexcusably, the media establishment largely ignored the hardball tactics. This is the same media that has doggedly reported on President Bush’s U.S. attorney firings and the post-9/11 interrogations of terrorist suspects.
I have no opinion on who should get what as part of Chrysler’s bankruptcy — other than that the taxpayers shouldn’t be paying for America’s version of lemon socialism so common around the world. But crude political interference by the political authorities in Washington in a bankruptcy case erode the rule of law and administration of justice. If Obama and company believe that the end justifies the end when it comes to handing the auto companies over to favored interests, who among us is safe from similar action by this or another administration in the future?
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Law and Civil Liberties
Name That Company: Fiasco
NPR asks listeners what the new company created by President Obama out of the remains of the Chrysler corporation, to be controlled by the United Auto Workers, funded by the American taxpayers, and managed by Fiat, should be called.
One listener suggested AutomObama, with the slogan ”You’ll Be Paying on It for Years.” Another offered “FIAT: Fix It Again, Barack.”
Of course, the name Fiat works pretty well for this new company. After all, “fiat” means, according to Webster’s, ” a command or act of will that creates something without or as if without further effort” or ”an authoritative or arbitrary order.” (And note that when you look up “fiat” in Webster’s, you get an ad for the new company.)
But it’s hard to beat the name suggested by most listeners: Fiasco.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Chrysler: Everybody Relax, This Is Exactly What Should Have Happened
A small group of Chrysler debt holders rejected the Obama administration’s restructuring plan last night, leaving Chapter 11 bankruptcy as the most salient option for the company.
The Obama administration accused the investors who walked away of “failure to act…in the national interest.” But it’s not difficult to understand why these secured creditors rejected the government’s offer of essentially 29 cents on their investment dollar. If that is how the Obama administration treats capital markets, how exactly do they expect to spur private investment in American companies, as the White House claims it wants to do?
Bankruptcy reorganization will probably yield a better deal for investors than the government’s plan. It also will imbue the process with more financial sanity than anything the Obama administration cooked up. For instance: the historically overindulged United Auto Workers might be forced to make more “sacrifices” than being handed a 55 percent stake in the company—essentially what the core of the administration’s plan would have accomplished—or reducing their CBA-mandated breaks from 16 minutes to 13 minutes.
Bankruptcy has been the best option all along. That was clear the moment it was determined that new private capital or adequate sales revenues would not be available to fund operations. But once the Bush administration circumvented Congress to throw Chrysler (and GM) a lifeline, and the Obama administration followed suit with implicit backing, uncertainty prevailed and the problem persisted. The bankruptcy process will produce a less politically driven solution.
Filed under: Cato Publications; Finance, Banking & Monetary Policy; Trade and Immigration
Tarred by TARP
Government-backed equity was offered to adequately capitalized banks in order to remove the “stigma” from banks receiving TARP funds, and the management of these institutions took the bait and accepted the money.
Surprise, surprise: now they discover that the money came with strings.
Some banks want to pay back the TARP money to extricate themselves from government restrictions on compensation and pressure to make loans the banks view as unprofitable. Treasury Secretary Geithner has made it clear that the decision to pay back the funds early won’t be left to the banks, but to the Treasury: “My basic obligation is to make sure the system as a whole … has the ability to provide the credit that recovery requires.”
The banking system has thus become a tool for the government to further its policies. And the bankers themselves put their institutions in that position. While taxpayers may understandably feel the bankers got their comeuppance, there are at least two major problems with the Bush/Obama policy.
First, Mr. Geithner has misdiagnosed the problem.
We are in recovery from the effects of the bursting of a massive housing and finance bubble funded by debt. That boom in turn financed a consumption binge of monumental proportions.
The only resolution of a spending binge is restraint in the form of saving. Recovery requires not more credit and another boom, but a dose of economic sobriety.
Individuals and firms know that and are de-leveraging – unwinding what they now realize is excessive debt. That will take the rest of this year and the better part of 2010. Overall, credit is down because demand is down.
Second, and even more disturbing: it appears that the Obama Administration wants to control the financial sector in order to gain control over what Lenin called the “Commanding Heights” of the U.S. economy: the major industries and sources of employment. The auto industry is a prime example, and one in which the administration has involved itself directly. It is also pressuring major recipients of TARP funds to ease the terms of the loans they have made to firms such as Chrysler. Treasury is attempting to use the banks to conduct fiscal policy through credit allocation.
The bankers taking TARP funds got their firms into a mess and deserve no sympathy. Anyone believing in free markets, however, must oppose this power grab by the Obama Administration.
Let the banks pay the funds back and let it be a lesson for CEOs and their stockholders: If you take government funds, you have taken on an unreliable business partner.
Cato and the Bailouts: A Correction for the NY Times ‘Economix’ Blog
At the New York Times Economix blog, economist Nancy Folbre of the University of Massachusetts writes:
The libertarian Cato Institute often emphasizes the issue of corporate welfare, but it’s remained remarkably quiet so far on the topic of bailouts.
Excuse me?
Since she linked to one of our papers on corporate welfare, we assume she’s visited our site. How, then, could she get such an impression? Cato scholars have been deploring bailouts since last September. (Actually, since the Chrysler bailout of 1979, but we’ll skip forward to the recent avalanche of Bush-Obama bailouts.) Just recently, for instance, in — ahem — the New York Times, senior fellow William Poole implored, “Stop the Bailouts.” I wonder if our commentaries started with my blog post “Bailout Nation?” last September 8? Or maybe with Thomas Humphrey and Richard Timberlake’s “The Imperial Fed,” deploring the Federal Reserve’s help for Bear Stearns, on April 14 of last year?
Cato scholars appeared on more than 90 radio and television programs to criticize the bailouts during the last quarter of 2008. Here’s a video compilation of some of those appearances.
Folbre complains that some people seem more concerned about welfare — TANF, in the latest federal acronym — than about welfare for bankers — TARP. Google says that there are 138 references to TANF over the past 13 years or so on the Cato website, and 231 references to TARP in the past few months.
Now she has a legitimate point. Welfare for the rich is at least as bad as welfare for the poor. And as much as welfare for the poor has cost taxpayers, the new welfare for banks, insurance companies, mortgage companies, and automobile industries is costing us more. Samuel Brittan of the Financial Times has written that “reassignment,” an economic policy that changes individuals’ ranking in the hierarchy of incomes, is far more offensive than a policy of redistribution, which in his idealized vision would merely raise the incomes of the poorest members of society. By that standard, taxing some businesses and individuals to subsidize the high incomes of others is certainly offensive. Of course, Brittan underemphasized the harm done by welfare to people who become trapped in dependency. But there’s good reason to oppose both TANF and TARP, and Cato scholars have done both.
Lest the good work of Cato’s New Media Manager Chris Moody go under-utilized, here’s a probably incomplete guide to Cato scholars’ comments on the bailouts of the past few months. (Note that it doesn’t include blog posts, of which there have been many.) Quiet? I don’t think so:
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