Did President Obama save the auto industry? | PolitiFact
It now seems certain that General Motors will declare bankruptcy on the initial bailout of General Motors and Chrysler, last December. In , GM received a secretive Chinese bailout that appears to have turned guessed that the biggest of the Detroit “Big Three” (GM, Chrysler, Ford) would go He describes the relationship between the two firms as being. In the absence of a bailout, GM and Chrysler would each have been forced to and an extended system of relationships with suppliers and customers — all of.
Louis and a new one opens in Kansas City, the workers don't have to move from St. More brands require additional marketing and product development expenditures, which drives incremental costs relative to the competition. Dealerships are protected by state laws that make them difficult to close without paying large fees.
If bondholders swapped stakes for common stock equity which pays no interest, GM's debt and interest burden would be substantially reduced.
However, bondholders of both Chrysler and GM rejected the debt swap offers, complaining of unequal treatment compared to the UAW, citing that their outstanding debt was more than double that of the UAW's health care trust. One lawyer for the Chrysler bondholders stated that auto task force head Steve Rattner had ignored negotiation requests from the bondholders committee, while Rattner also threatened to destroy one of the bondholder's reputation for holding out. Not from the United States.
The hedge funds stated that their clients included pension funds and university endowments. Economists used — data to build estimates of what a shutdown would cost in summerin order to set benchmarks to help policy makers understand the impact of bankruptcies.
Such estimates were widely discussed among policy makers in late That would reduce GDP by 0. He compared the possible collapse of the U. Daewoo's proportionate economic impact on Korea was larger than that of the Big Three to the United States. The persistence of the belief that Daewoo and other Korean conglomerates were too big to fail led many bankers and investors to continually waste money on bailouts, despite their poor business plans and unprofitable projects, as Daewoo was unable to repay these loans.
Once the too-big-to-fail perception was dispelled, with large conglomerates no longer considered the safest investments, bankers and investors began financing new opportunities in areas which had been starved of capital small firms, entrepreneurs and consumerswhile Korea's GDP actually rose after Daewoo's unwinding. Schuman also noted a similar analogy with Japan during its Lost Decade of the swhere banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail.
However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise.
Many of these include bankruptcy, a court-supervised method of reorganizing or shutting-down a company. Bankruptcy and alternatives[ edit ] Bankruptcy discussions centered around the prospect of Chapter 11 bankruptcycommonly called restructuring, commonly used to provide a window of opportunity for a corporation to renegotiate contracts, sell assets or component businesses for cash, obtain debt forgiveness, or otherwise reform itself as a viable business enterprise.
The alternative, Chapter 7 bankruptcyis used to shut down and liquidate an enterprise and sell off the pieces, with the proceeds going to the debt holders. Under both types of bankruptcy, the shareholders typically lose their investment and debt holders obtain control of the corporation. During Novemberthe debate involved whether a Chapter 11 filing would be beneficial or feasible.
That's all it is. They suggested that a government " car czar " would be ineffective since their actions could be swayed by Washington politics. Advocates have argued that the government or private lenders could establish a fund to enable warranty coverage. PBGC Director has said: We can't successfully monitor the situation if they are not responsive.
Advocates have indicated this would be preferable, while critics argued it was unlikely that all of the stakeholders could agree on terms while outside of bankruptcy. Loans would be provided immediately, with conditions. He advocates a U. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned.
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But instead with a bailout, the rewards are reversed — the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me The Supreme Court later held any further challenges to the legality of any aspect of the Chrysler case to be moot, without offering specific justifications.
The bailouts of GM and Chrysler at the end of — and the extension of those bailouts in the beginning of — were therefore both unnecessary and very likely illegal. But that was hardly the end of the story. At first, when the government announced that Chrysler and General Motors would be filing for Chapter 11, the news was received with relief by the market, the companies' creditors, and everyone concerned for the rule of law.
The mess created by the bailout could finally begin to move from the political arena to the legal arena, and so regain some semblance of legitimacy and order. But it wasn't long before these hopes were dashed by the government's management of the process.
Instead of a regular bankruptcy proceeding, the Obama administration, working with the automakers, patched together a process without precedent — a bankruptcy combined with a bailout, incorporating the worst elements of both. Of the two proceedings, Chrysler's was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations.
Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the "absolute priority" rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up.
In the Chrysler case, however, creditors who held the company's secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.
Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a "deficiency claim" — the terms of which keep the bankrupt company liable for a portion of the unpaid debt.
In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors.
US expands auto industry bail-out with $6bn for GM's finance arm | Business | The Guardian
Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms. To make matters worse, both bankruptcies were orchestrated as so-called "section " sales.
This meant that essentially all the assets of "old Chrysler" were sold to "new Chrysler" and "old GM" to "new GM"and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a "sub rosa plan. In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights.
As the University of Pennsylvania's David Skeel observed last year, "selling" an entire company of GM or Chrysler's size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in precisely to eliminate this practice.
At first, the fact that the companies' creditors and especially Chrysler's creditors, who were so badly mistreated put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors.
Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders' acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.
Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly. A group of hedge funds that were among Chrysler's creditors initially objected to the bailout plan that preferred the UAW at their expense. In a now-infamous speech in AprilPresident Obama publicly attacked these investors — who were merely standing up for their contract and property rights — as profiteers, criticizing them for their unwillingness to make the same sacrifices as other investors but not, of course, UAW members, who received a windfall.
In response to this public browbeating from the president of the United States, the hedge funds caved and agreed to the terms. In the end, only one group of Chrysler bond holders — the Indiana state teacher and police pension funds — continued to object.
Indeed, they objected at every stage of the process, but the Supreme Court declined to hear their case. General Motors, too, had issued secured debt during its years of financial turmoil, but these bonds made up a far smaller fraction of the company's total outstanding debt. And in striking contrast with the Chrysler case, General Motors's bankruptcy plan left the secured creditors intact, paying them the full value of their claims. From the perspective of bankruptcy law and contract rights, this development was encouraging: The Obama administration did not seek to plunder GM's secured creditors as it had Chrysler's.
From the perspective of the rule of law, however, this differential treatment might have been even more troubling.
The Auto Bailout and the Rule of Law | National Affairs
On the matter of secured-bond holders, the cases of GM and Chrysler were functionally indistinguishable — and yet GM's secured creditors were treated far better than Chrysler's. The administration offered no public justification for this differential treatment, and to an outside observer, there was only one key difference between the cases: The amount of GM's secured debt was relatively small compared to Chrysler's.
The obvious conclusion, then, is that the difference in how the government treated the automakers' creditors was purely a matter of expediency — hardly a justifiable rationale. This was especially true of GM, in which the government at first had a majority stake, and in which it still possesses about one-third of the common stock. Some government interventions were relatively subtle — the companies' increased emphasis on hybrids and electric vehicles, for instance, which are Obama-administration priorities but hardly sound economic choices for troubled automakers.
But other interventions were quite egregious — especially those related to the automakers' decisions about closing dealerships. Because of state laws that are highly protective of auto dealers, terminating and closing dealerships can be extremely difficult and expensive.
Bankruptcy provided the opportunity to cut through this red tape by pre-empting those state laws, and so offered the automakers a valuable chance to streamline — which is, of course, the very purpose of bankruptcy re-organization. Unfortunately, the automakers came up against the same force that produced those protective state laws in the first place: Indeed, in many congressional districts, auto dealers are among the most high-profile members of their communities; they sponsor Little League teams, support local charities, and host political fundraisers.
It was therefore not surprising that Washington politicians were so aggressive in their efforts to reverse GM's decisions about dealership closures. Senator Amy Klobuchar, for instance, persuaded GM to rescind a closure order for a large dealership in Bloomington, Minnesota. Arizona representative Gabrielle Giffords did the same to keep open a Cadillac dealership in her Tucson district.
In addition to these ad hoc interventions, Congress passed a law in December giving terminated dealers special rights in seeking arbitration — a process that has burdened GM with substantial delays and costs. According to an August report in Automotive News, of cases that had actually gone to arbitration, GM had won 39 and lost Furthermore, the company had entered into letters of intent for conditions for reinstatement with other dealerships.
In addition, GM had settled disputes with dealers under undisclosed terms; according to lawyers for the dealers, however, the dealerships were usually terminated only after GM paid case settlements — settlements that, in some instances, reached as high as several million dollars.Milton Friedman - GM Auto Bailout
The result of the law has thus been an unimpressive arbitration record for General Motors, and the retention of many more dealerships than sound business principles could justify.
Such political pressures were exerted on behalf of suppliers, too. For instance, GM had for several years purchased the mineral palladium from a Montana mine; upon filing for bankruptcy, the company decided to replace the Montana distributor with cheaper suppliers in Russia and South Africa.
Similarly, when GM announced plans to produce a new subcompact car in China, immense pressure from Capitol Hill forced the company to reverse its decision. Arriving at more efficient dealership arrangements and more cost-effective relationships with suppliers was, of course, one of the chief reasons given for putting the automakers into bankruptcy.
But these aims were seriously undercut by the meddling of elected officials. In broad strokes, the answer is yes, but with some help from the other party and with one huge unknown -- no one can say what would have happened without massive government intervention.
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We spoke with a number of analysts and read many independent reports. There is no question that General Motors and Chrysler are profitable today.
But so is Ford, a company that received no financial aid at all. The jobs have returned -- although not nearly at the level they were before the industry began its steep decline in Without a doubt, the American auto industry emerged smaller and more competitive.
In the words of the bipartisan Congressional Oversight Panel that assessed the impact of the government's efforts: According to several experts, he needs to share it with his predecessor, President George W.
Layoffs at auto plants and among auto parts suppliers were on track to reachworkers. Gasoline prices were up and buying power was down. General Motors was virtually out of cash to pay its bills and Chrysler was not far behind. The Center for Automotive Research, an independent research group that gets some funding from automakers, predicted harsh outcomes if GM and Chrysler went belly up. Beyond the immediate jobs lost, there would be a partial collapse of the supplier industry that would lead to a 50 percent drop in production at Ford and the American-based foreign car plants.
Imports would replace 70 percent of the lost GM and Chrysler production, the group predicted. When President Obama took office, he created a task force with a sweeping mandate to determine the fate of GM and Chrysler. In MarchObama rejected those plans and said if the firms wanted federal money, they had to go through bankruptcy.
The car companies filed for bankruptcy in June and emerged in July. Between andcarmakers closed or scheduled the closure of 16 plants and cut their ties with about 2, dealerships.
Stockholders were wiped out and creditors such as banks and pension funds wrote off about two-thirds of the value of their claims.