December 8, 2010
Crony Car CapitalismBy Gary Jason
Several recent revelations bring home just what a cesspool of crony capitalism the American auto industry has become. The Obama administration and the UAW (Obama's major financial and political supporter) are running the show.
First is the news that the "new" GM walked away from the crony bankruptcy proceedings with a huge tax break -- one worth up to $45 billion. It was revealed in the paperwork filed for its IPO that the Obama administration gave the new GM a sweetheart deal: it will be allowed to carry forward huge losses incurred by the "old" GM prior to its bankruptcy. Of course, the IRS doesn't allow the new companies that emerge from bankruptcy to write off their old losses. But the feds decided to waive that rule for companies bailed out by TARP.
Thus, the new GM will save about $45.4 billion in taxes on future earnings, which may allow it to escape taxes for the next twenty years. This "tax-loss carry-forward" is a huge plum, an asset most of GM's rivals don't have, and one that no doubt led to its artificially high IPO stock price.
This brings up the second revelation: namely, the machinations by the Obama administration during the IPO that consciously helped the UAW make out like bandits.
The UAW was given a big chunk of new GM in the crooked bankruptcy settlement. To be precise, the very monster that drove GM off the cliff -- the UAW -- received 35% of the stock in the new company. With the sale of the stock in the new GM, the UAW earned an immediate $3.4 billion in selling about one third of its shares.
Moreover, if the UAW can get $36 per share for the other two-thirds of its shares, it will walk away breaking even -- meaning it will walk away with its outrageously bloated pension and health care fund fully intact. The taxpayer, on the other hand, hasn't fared well at all.
In fact, the Obama administration screwed the taxpayer just as thoroughly as it pampered the UAW. The taxpayer put $49.5 billion into GM in the bankruptcy, not to mention all the funds shoveled at the company prior to that. The Treasury recouped only a wretched $13.7 billion in the IPO, mainly because the Obama administration -- in yet another unprecedented gift to the union -- announced publicly that it would not sell any more stock for the next six months. This enables the UAW to dump its shares whenever it wants at a much higher price than it could get if the Treasury were also selling. The taxpayers will almost certainly get a lower payout, and they will never recoup their forced investment in these dinosaurs -- all to enable the UAW to walk away made whole.
Screwed even worse were the old secured creditors -- you know, the ones near the front of the line in bankruptcy filings way back when America was governed by the rule of law. The bondholders in the old GM have bonds as useful as scratch paper. (I won't mention the stockholders in the old GM, because stockholders -- who are only the legal owners of a company! -- typically got nothing in bankruptcy.)
The Obama administration car czar, who engineered the crony bankruptcy -- the aptly named Steve Rattner -- claims that the secured creditors would have received nothing in a standard bankruptcy anyway. But his claim is ludicrous on its face: in a regular bankruptcy, the union contracts that caused GM's and Chrysler's failure would have been nullified, and the substantial assets of the companies (plants, inventory, receivables, land, patents, etc.) would have been worth a substantial amount to other automakers and investment companies. The proceeds would have gone to satisfy the bondholders at least to a fair degree.
The third recent revelation about the U.S. automakers was the news that the Obama administration changed the purchasing of vehicles for the federal fleet dramatically; again, apparently to benefit its supporters.
It turns out that the administration itself has purchased a huge, unprecedented chunk of American-made hybrid cars assembled since it took over two of the loser companies. This has propped up the sales of hybrid cars in the face of widespread consumer indifference.
The U.S. General Services Administration (which handles the federal fleet of cars) bought nearly 15,000 hybrid cars over the last two years, or about 10% of the government cars purchased. This compares to only 1% of the fleet being hybrids just two years ago. Even more striking, more than 20% of the hybrids the GSA purchased were bought using "stimulus money" (yes, the GSA got "stimulus money" -- $300 million in total!).
Furthermore, it is interesting to note that of the 15,000 hybrids that the GSA bought, only 22 were from Toyota and Honda. All the rest were purchased from GM and Ford. (Chrysler stopped making hybrids back in 2008 after a brief attempt.) The GSA in total bought nearly 25% of all the American-produced hybrids made over the last two years.
Why is that? We can dismiss the idea that it was because the Obama administration judges the Japanese hybrids inferior; the Japanese are widely viewed as having the lead in that technology, and they produced hybrids before Detroit did. No, it is doubtless because the UAW controls Ford and GM, and the UAW was (and is) a huge contributor to the Democratic Party, and the Obama campaign in particular. After all, consumers are not sold on hybrids -- globally, hybrids account for only about 2% of all auto sales. But the Obama administration -- to pay off its union and environmentalist big money donors -- is buying thousands of hybrids from the American auto makers.
So there you have it. The Obama administration rigged the bankruptcy to favor the union, rigged the IPO to favor the union, and has purchased much of the inventory unsalable in the free market, again to benefit the union (and the environmentalists). But of course, the unions (and the environmentalists) pumped many millions of dollars into Obama's campaign. They also and pumped many millions into trying to keep Democratic candidates in office in the last election.
This is corrupt, crony car capitalism, all paid for by coerced taxation, from an administration that promised a new era of transparency and honesty in government. But at the end of the day, the cabal at the top behaves just like the dirty Chicago machine that spawned it.
Gary Jason is a contributing editor of Liberty and a philosophy instructor.