The proposed end games for General Motors and particularly Chrysler illustrate why government shouldn’t have gotten involved in the first place.
It’s worthwhile to begin with the broader picture. Americans used to buy about 17 million new cars and trucks a year. Now, we’re buying fewer than 10 million. That, of course, puts considerable stress on manufacturers with weaker products or financial structures.
How many new cars Americans will want to purchase in the future is unknown. But there can be a high degree of confidence in this: However many it is, someone will sell them to us.
Moreover, they are likely to be produced in the United States. A majority of cars sold by foreign manufacturers in the U.S. are actually built here.
So, why should the federal government care who it is that sells us our cars?
There are two rationales offered. First, to preserve an “American” auto industry. Second, to preserve “American” jobs.
The proposed Chrysler restructuring gives the lie to both rationales.
Under the Obama administration’s proposal, Chrysler would, in essence, be given to Fiat, an Italian company, to operate.
So, how is an Italian car maker operating in Michigan any more “American” than a Japanese manufacturer operating in Kentucky?
And why should the federal government give a market preference – through taxpayer financing and warrantee guarantees – to Italian cars produced by American workers in Michigan over Japanese cars produced by American workers in Kentucky?
The Obama administration’s proposed restructuring is more than just unjustified, however. It dangerously undermines the rule of law, as explicated so beneficially by Friedrich Hayek in his classic, “The Road to Serfdom.”
The essence of the rule of law, according to Hayek, is that what the government will do is known to all economic actors in advance. That government will not act arbitrarily in specific circumstances to favor some economic actors over others.
Chrysler has $6.9 billion in secured debt. Under the law, secured lenders have the first claim on the assets of the debtor in the event of nonpayment.
The Obama administration is attempting to muscle past this law. Under its proposal, the health care trust of the autoworkers union, an unsecured creditor, would forgive 57 percent of what Chrysler owes it, and receive 55 percent of the company’s equity in exchange.
The federal government would forgive about a third of what it would loan Chrysler and receive 8 percent of the company’s equity. Fiat would pay nothing for its 20 percent initial ownership.
The secured creditors, with the first claim on Chrysler’s assets, were asked to forgive 70 percent of what they are owed and receive nothing in equity. When they refused and forced the company into bankruptcy, they were excoriated by Obama – a shameful act by a president who pledged to uphold the law, not make it up as he went along.
The purposed GM restructuring is equally lopsided. The union trust would forgive half of what it is owed and receive 39 percent of the company. The government would forgive half of what it is owed and receive 50 percent of the company.
The other private lenders, in this case unsecured, would forgive 100 percent of what they are owed and receive just 10 percent of the company.
In his recent press conference, Obama said he had no interest in owning or operating car companies. Until this point, I was willing to accept Obama at his word, while fundamentally disagreeing with his economic policies.
Given his actions, however, it’s hard to credit his disclaimer in this instance.
These proposed restructurings are power grabs, pure and simple. The positions of lenders are eviscerated to give control to the union trust and the government.
The emergent companies are given market preference through taxpayer financing and government warrantee guarantees. All to serve no true national purpose.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com