The Auto Bailout One Year Later: Was It Necessary? Did It Work?

President Bush provided the initial bailout for GM and Chrysler in December 2008, so it’s reasonable to look back a year later and ask: Was the bailout necessary? Did it work?

In hindsight it is readily apparent that the answers are: No, and No.

President Bush argued that the bailout was needed to keep GM and Chrysler out of bankruptcy, because nobody would want to buy cars from the companies if they went bankrupt. There would be questions about whether warranties would be honored, whether dealers would be available for service, and other issues that would come up with a durable good purchase.

We can see that the bailout didn’t work, because after receiving bailout money from the Bush administration, and then another dose from the Obama administration, both companies declared bankruptcy in June anyway. And, because the bailout didn’t work, it’s easy to see that it wasn’t necessary.

In hindsight it is easy to see we should have allowed GM and Chrysler to go bankrupt last year. Perhaps they could have reorganized, shed some of their liabilities and become viable concerns again. Perhaps they would have had to liquidate, in which case their factories and their brands would have gone to companies that could have made better use of them. Indeed, that is what ultimately happened to Chrysler, which was taken over by Fiat.

What happened to GM was much worse.

Because GM accepted the bailout money, President Obama forced Rick Wagoner out as GM CEO. Americans should have been outraged at the precedent that, apparently, gives the president of the United States the power to determine who will be the CEO of a private corporation.

When GM declared bankruptcy, because of the federal money GM had received, President Obama strong-armed bondholders into accepting pennies on the dollar for the GM debt they held, while giving the United Auto Workers 17.5% ownership in the restructured company. Bankruptcy law does not give a company’s employees claims in front of debt holders.

The federal government seized 61% of the restructured GM, placing the government’s claims ahead of debt holders. This was unfair to the company’s bondholders, it effectively nationalized the automaker, and the nationalization and confiscation of bondholder assets makes it virtually impossible for GM to repay the federal government and escape its current status as a government-owned company.

The federal government has now sunk $50 billion into GM, and it is difficult to see how GM could ever raise enough money to buy their way out from under government control. Certainly they can’t borrow it, after the federal government screwed the previous bondholders.

The Bush administration went back on its word when it bailed out GM and Chrysler. They used TARP money for the bailouts. Treasury Secretary Paulson originally said the TARP money was only to be used only for financial institutions, and repeated that when the auto companies originally approached the administration for a bailout. So, GM and Chrysler went to Congress, but when Congress refused to bail them out Bush and Paulson did what they said they wouldn’t and gave the companies TARP money.

The problem originated with TARP, which essentially gave Secretary Paulson a blank check. When you’re spending someone else’s money, it’s easy to spend it irresponsibly.

We’ve all heard that hindsight is 20-20, but on the anniversary of the auto industry bailout we need to articulate why it was such a bad idea so that it becomes a part of the public consciousness. We need a public understanding that the bailout was a huge mistake to keep it from being a public policy precedent.

Randall G. Holcombe is a Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America (edited with Benjamin Powell); and Writing Off Ideas.
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