University of Pennsylvania law professor David Skeel has an excellent article in the Wall Street Journal (June 5, 2011) challenging the notion that the GM and Chrysler bailouts are a “success” story. The bailouts will inevitably be an issue during next year’s presidential election, with President Obama making the case the bailouts were not only successful but at good financial deal for the American taxpayer. Skeel points out that, in fact, taxpayers will end up subsidizing these two companies (to the tune of $14 billion) and that the government rigged their restructuring in ways that consciously ensured Big Labor’s “pain” would be minimized while maximizing the pain felt by bond holders and shareholders.
More importantly, I think, Skeel points out that the bailouts didn’t have to happen at all; both companies could have gone through the traditional bankruptcy process. GM probably would have survived although Chrysler likely would have seen its divisons (e.g., the profitabl jeep division) sold off. Writes Steel:
“If the government wanted to “sell” the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. Victims of defective GM and Chrysler cars waiting to be paid damages weren’t so fortunate—they’ll end up getting nothing or next to nothing.
“Nor would both companies simply have collapsed if the government hadn’t orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM’s ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there’s a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process.
“Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.”
The bailouts were really politically motivated initiatives that ended up serving the political ends of the Obama Administration (although it’s unclear whether the Bush Administration would have resisted the same temptations to step in).
Reason Foundation’s Shikha Dalmia has also weighed in on this issue, detailing the ways the government forced bankruptcies created a paper success and showing how the benefits of the federal government’s intervention were illusory at best (and politically manipulative at worst).