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Tag Archives: Treasury

Good Reasons Why the GM Bailout Was Not a Good Thing

I came across an opinion piece that reminded me of the reasons why the GM bailout was not a good thing.  Shikha Dalmia explains why in an article at Reason.com called “Driving to Delusionville.” He mentions many reasons that have been stated before, but here is my favorite:

It gave Chrysler’s secured creditors, who would have had priority in a normal bankruptcy, 29 cents on the dollar. Chrysler’s unions, on the other hand, got more than 40 cents, even though they are equivalent to low-priority lenders. This made a mockery of longstanding bankruptcy law, something that will make credit markets wary of lending to political sacred cows in the future.

The administration favored union workers not only over creditors, but also other workers. All United Auto Workers retirees at Delphi, GM’s auto supplier, got 100 percent of their pension and retirement benefits. But 21,000 nonunion, salaried employees lost up to 70 percent of their pensions, and all of their life and health insurance. The Treasury could have covered 93 percent of the benefits of all employees for the same funds it spent on full union benefits, testified Bruce Gump, a representative of the Delphi Salaried Retirees Association.

So, not only did the government meddle when it wasn’t necessary, they managed to make sure union workers (who tend to vote Democrat) got good deals, while pretty much sticking it to the non-union employees and creditors. I would love for someone (anyone!) to get the White House to explain why the unions should get special treatment. The way the non-union Delphi employees were treated is absurd and indefensible.

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The left says the GM bailout is a success. The right disagrees. Who is correct?

Logo of General Motors Corporation. Source: 20...

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This week, GM launched an IPO, moving forward in a turnaround that many thought unlikely a few years ago.  Just a couple of years ago, GM was losing a ton of money, closing dealerships, and about to go into serious bankruptcy.  Bush 43 began the bailout process with over $17 billion in loans.  Obama and Co continued the bailout, but with a caveat that many still consider controversial to say the least:  the United Auto Workers came out with a larger stake in GM than the shareholders and bondholders, even though the amount GM owed the union was less than that owed to the shareholders.  Many feel that letting GM go into bankruptcy and emerge leaner and profitable would’ve been better and allowed the pain to be shared more equally.  Many also felt that allowing the unions to end up with a larger share that seemed out of proportion was an obvious example of the Dems giving special treatment to their union supporters.

Sidenote:  many of the left leaning sources that are celebrating the IPO are saying the company would’ve died without the bailout.  This isn’t necessarily true.  A large number of companies that go into bankruptcy eventually come out.

So my good friend Ocie asked me this morning:  “GM IPO, we’re making American cars, people are employed, was the $50B bailout of GM worth it?”  My immediate answer to him was that it would be worth it once the US breaks even on its investment at least (the US Treasury owns a 33-35% stake in GM, that it took instead of money payback).  Having thought more about it, I would say that it has its positives and negatives.  I agree jobs were saved, but there is no guarantee jobs would not have been saved via bankruptcy.  I will say that bankruptcy may have had more of a negative impact “down the line,” as in the vendors that do business with GM.  But it can’t be denied that politics played a part in the end result–the union ended up with a larger stake than stock and bond holders.  And it will be years before the US is fully divested and paid back on their “investment.”

So let’s declare that it was worth it, but should’ve been done differently.