Assessing the Bailouts

Here are some libertarian warnings about the government rescue of General Motors:

“The current restructuring plan calls for the U.S. Treasury Department to have controlling interest in General Motors, which amounts to absolute nationalization. In GM's headquarters in Detroit there is a cluster of bureaucrats from the government's task force telling GM how to run its business. . . . Furthermore, the White House fired General Motors Chairman and CEO Rick Wagoner. When the executive branch intervenes in a private business and ousts management, bailout or not, it is a staggering violation of the American ideal of free enterprise. This sets a precedent for unlimited government trampling over the private sector. On March 30th, Obama said, ‘Let me be clear. The United States government has no interest in running GM. We have no intention of running GM.’ If that's the case — and we know it's not — then why scoop up majority ownership?” (Karen DeCoster, LewRockwell.com, May 23, 2009)

And:

“Will GM be run as profitably and efficiently as Amtrak? Will GM be paid not to produce, like the agricultural sector? Will it feed into an economic bubble like Fannie Mae and Freddie Mac? Will it boast the negligible oversight and waste of the so-called ‘stimulus’ package? Will it feature the fiscal irresponsibility of Social Security? Or will we see the runaway costs of Medicaid?” So many options. (David Harsanyi, Reason.com, June 3, 2009)

And:

“GM’s bankruptcy announcement today . . . might well be remembered as the company’s last act of capitalism. If GM emerges from bankruptcy organized and governed by the plan created by the Obama administration, it is impossible to see how free markets will have anything to do with the U.S. auto industry. With taxpayers on the hook for $50 billion (at a minimum), the administration will do whatever it has to — including tilting the playing field with policies that induce consumers to buy GM or hamstring GM’s competition or subsidize its costs — in order for GM to succeed.” (Daniel Ikenson, Cato@Liberty, June 1, 2009)

And:

“The more the Treasury lends, the more GM will come to be Government Motors. In Obama's America, that will mean becoming a development project for electric cars, plug-in hybrids, or whatever it is the politicians want. The result might be wonderful, but the history of state-controlled companies suggests boondoggles are more likely. The best thing is to let GM do what failing companies have always done: reorganize if possible, liquidate if necessary. . . . Let it go, and let investors put their money where the odds are better.” (Bruce Ramsey, The Seattle Times, April 1, 2009)

That last excerpt is, of course, by me. I didn’t condemn the firing of Rick Wagoner, because I would have fired him, too. But on the main point — that so much government money risked turning GM into a money-losing government pet — I agreed.

It hasn’t happened that way. As I write, the new GM has had three quarters in the black, the latest one earning five and a half cents of operating profit on each dollar of sales. That’s quite respectable. In November 2010, GM became a public company again with a stock offering. GM planned to offer the stock at $26 to $29, depending on the market, but demand was so strong that it sold the shares at $33; and as I write, the stock is trading above that. The stock offering reduced the Treasury’s stake in GM from 60.8% to one-third. If the US government can sell its remaining stock at $53, it will break even.

Chrysler hasn’t done as well, but it is also in the black, and looks like it will make it.

Of course, disaster could yet strike and turn the pessimists into prophets. But let’s be honest: so far, the affair has turned out much better than we feared. We ought to know why, especially if we expect to oppose the next bailout.

One place to start is Steven Rattner’s book, Overhaul, subtitled An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry. Rattner, 58, was President Obama’s “car czar” on the GM and Chrysler rescues. Rattner is a Wall Street guy; he was a founder and partner of the Quadrangle Group, a leveraged buyout firm. Before that he was a reporter for the New York Times, which explains why his book reads so well.

Of course, you are free not to believe his account. I haven’t seen it contradicted, so I take it at face value. Reasons may come along to change that. So far they have not.

I don’t share Rattner’s politics. He is an Obama man. He has raised money for Democrats, and his wife Maureen is a former national finance chairman of the Democratic Party. He says in the book that he is a Democrat because “the Republicans had favored the rich at a time of growing income inequality, abandoned fiscal responsibility, and held unfortunate positions on social issues such as a woman’s right to choose abortion.”

As “car czar,” Rattner was leader of Team Auto, a group of people, mostly from outside government, whom he recruited. His bosses were Larry Summers, President Obama’s chief economic adviser; and Tim Geithner, Obama’s treasury secretary. Rattner says his task “was not designed to further a particular economic theory,” but was strictly to save those parts of GM and Chrysler that could be made economically viable. He says that in his meeting with Obama on March 26, 2009, the president told him, “I want you to be tough and I want you to be commercial.”

Rattner focused on GM. When his work began, in January 2009, the company already had been given billions by the Bush administration and was burning through it at a bonfire rate. The economy was in panic. The Dow Jones Industrial Average was shriveling to 6,600, the figure it would touch in early March. GM was no longer a viable enterprise. On his judgment of GM, Rattner sounds much like the libertarian accountant Karen DeCoster, who had been saying on LewRockwell.com for several years that GM was an ongoing industrial disaster.

Rattner is no partisan of unions; he recalls his days at the New York Times when the Newspaper Guild defended featherbedding and incompetents. But he does respect unions, and he doesn’t blame them for what happened at GM. It’s management that runs a company. As a leveraged buyout guy, he had expertise in firing, hiring, and evaluating managers — and at GM he was appalled by what he saw and heard.

“From Wagoner on down,” he writes, “GM seemed to be living in a fantasy.” To executives, the problem was entirely the recession, not the GM product line or the way the company was run. GM management’s idea, Rattner says, “seemed to be to trim only what was easily achieved and absolutely necessary, and use taxpayer dollars to ride out the recession.”

But GM had been bleeding market share continually for 33 years. After rebates, its cars sold for thousands of dollars less than their European and Japanese counterparts — a market measure of the people’s esteem for the products. For management not to see that was a kind of sickness. GM had a culture of excuses, of institutionalized failure.

Rattner’s killing comment: “No one at GM thought like an owner.”

Team Auto’s idea was that government money would come only with big changes to make GM viable, including sacrifices by management, labor, bondholders and creditors, and with a major mind readjustment at the top. The place to begin was the CEO.

“After nearly a decade of experience as a private equity manger, I believe in a bedrock principle of that business: put money behind only a bankable management team. To my mind, no private equity firm on the planet would have backed Rick Wagoner or GM’s current board. . . . A CEO who leads a company into a state in which its only recourse is a government bailout shouldn’t be in his job.”

And that’s right. There was a hullabaloo in the press because the government fired Wagoner. So it had; but the government was the investor, and an investor may put conditions on his investment. He who pays the jukebox calls the tune.

The critics wanted GM to be put into bankruptcy — either Chapter 11, in which creditors are partly stiffed and the company survives, or Chapter 7, in which the creditors are given the carcass. The critics tended to gloss over the fact that each of these procedures involves the government, in the form of a federal bankruptcy court. Each involves the breaking of private contracts. The difference is that in a bankruptcy the decisions are made by a judge (appointed by other judges) rather than by a politician or direct political appointee. The other difference is that a bankruptcy judge does not have a pipeline to public money.

Those are important differences, but it’s still the government.

An ordinary Chapter 11 would have taken perhaps 18 months, and Rattner says there was no way GM could get debtor-in-possession financing from a bank for such a period. Wagoner had waited too long, and GM was too weak. Wagoner told Team Auto that once the company was in bankruptcy, he believed nobody would buy its cars, because customers would be worried about warranty coverage. Because of that, Wagoner said, he had done no preparation for a Chapter 11. The warranty problem was real, but this was also a self-excusing argument from a guy lining up for a bailout.

There was a different kind of Chapter 11 called a Section 363. It had never been tired on an industrial company the size of GM or Chrysler. A Section 363 allowed Team Auto, the new investor, to fashion a new GM from the assets of the old, leaving creditors to fight over the bones of Old GM. In that way, Team Auto brought out what Rattner calls “Shiny New GM” in a little more than a month.

Maybe that tells something about bankruptcy. Critics write as if bankruptcy were a fixed thing, like the Ten Commandments. But it is a human institution, and may be changed so that it works better or worse.

In the GM case, the stockholders would get nothing, which is what they would have gotten anyway. The bondholders would get a share of New GM worth about 35 cents on the dollar — an amount Rattner says was more than they would have received in a straight liquidation and therefore too much, because the government wasn’t intervening on account of them. The workers’ medical benefit trust would get a piece of the new company in exchange for releasing the new GM from all of its retiree medical obligations, which, unlike pensions, are not guaranteed by the Pension Benefit Guraranty Corp. The United Auto Workers would get a seat on the GM board. The Canadian government, also investing capital, would get a 12% stake.

And the US Treasury would get almost 61%. That was a problem. Contrary to all the muttering about Obama being a socialist, the president didn’t want the government to own GM, nor did any substantial constituency in the Democratic Party. And yet, when the decision came about taking shares of stock, it was this, according to Rattner: “We can either get nothing for something or we can get something for something.”

Given that choice, taking the equity was the right decision. If you’re going to pay the money, you may as well get something for it. The Treasury did, and the result of that decision a year and a half later is that the taxpayers have been made one-third whole, and have a chance of coming out entirely whole.

And compared with things two years ago, that is an economic success.

Rattner wants to say there were no politics involved in these decisions, but he can’t quite do it. The choice to undertake the project in the first place was political. And always there was what Rattner calls “the Washington Post Test”: don’t do anything that you don’t want to see written about in theWashington Post.

But the bounds of the politically possible left a large space, and within this space Team Auto had discretion. Rattner writes, “No one in the Obama administration ever asked us to favor labor for political reasons.” Indeed, one of his chapters is called, “F**k the UAW,” a quotation he attributes to White House Chief of Staff Rahm Emanuel.

Organized labor took its lumps in the rescue — at GM it lost almost one-third of its North American jobs. But it came out ahead of where it would have been with no rescue, and it preserved its pensions and high wages for older workers by pushing pay far down for new workers.

With GM, Team Auto assumed from the start that there was a commercially viable core. This wasn’t obvious with Chrysler. It was smaller than GM, and Rattner says the economic case for saving it was much weaker. Obama’s economist, Austan Goolsbee, argued that Chrysler ought to be liquidated: the net loss of US jobs wouldn’t be so bad, because many of Chrysler’s customers would buy their cars from GM and Ford. Better to have two strong companies than three weaker ones. At one point Team Auto considered a plan to transfer Chrysler’s top brands — Dodge Ram, Jeep, and Chrysler minivans — to GM, and shut down the rest.

Team Auto was divided on whether to subsidize a deal with Fiat to save Chrysler. Rattner voted to do it, but he sounds as if he wished he hadn’t. The matter finally went to Obama, who said to do it. That is when Obama told Rattner to be “tough” and “commercial”—advice that Obama was not exactly following, himself.

The main theme of Rattner’s book is that the GM deal — the big one — was done much as a private investor would, if the investor had decided already to do something. Team Auto’s aim was to make the company profitable. That meant a new CEO, a new chief financial officer, a new chairman, and several new members of the board. It meant shedding Pontiac, Saturn, Hummer, and Saab, and narrowing the product line to Chevrolet, Buick, Cadillac, and GMC Trucks. It meant shedding almost 30,000 jobs. And it meant cutting out 1,124 GM dealers.

The political interference after the deal was announced came from Congress, on behalf of dealers. Each member had imperiled dealers in his district. Sen. Kay Bailey Hutchison, Republican, held up a war-funding bill on behalf of Texas car dealers. House Majority Leader Steny Hoyer, Democrat of Maryland, went to bat for a dealer who had sold only three Chryslers in all of 2008 — and later told Rattner he’d let the companies keep too many dealers alive. Or so Rattner says. Rep. Gabrielle Giffords, Democrat of Arizona, went to bat for a Chrysler dealer, Rattner writes, and “repeated her talking points over and over.”

The intervention by Congress, Rattner writes, was “an enormous, pointless distraction for the two companies at a critical time. Its interference left me wondering what in the auto rescue Congress might like to micromanage next — choosing factory locations or deciding which executives and workers stayed and which had to go?”

That’s politics. The incentives facing elected officials are alien to the imperatives of business. Of course, members of Congress would not have had the ability to intervene so easily if there had been no intervention by the executive branch.

Which gets back to the original question. Obama is an elected official. Why did he let this be done in a mostly businesslike way?

Rattner doesn’t ask the question, but the answer that floats to the surface is that Obama is responsible for the whole country, not just congressional districts with GM and Chrysler assembly plants.

But it was more than that. Probably the strongest reason why Obama didn’t politicize the bailouts to the extent that libertarians feared — and a reason not in Rattner’s book — is that the American people, Republicans and Democrats included, hated the bailout. The polls were clear about that. The first demos of the Tea Party showed it. So did the rise in the reputation of Ford, which became America’s most popular car company because it never took a bailout. There simply was little political gain for Obama in creating Government Motors, and much political hazard.

So he didn’t do it. By the standards of capitalism — the standards of the market — the bailouts have turned out well. The new General Motors and the new Chrysler are viable companies. Libertarians have to admit that.

When they do so, they should also point out that much of this was due to luck, and not anchored in the nature of things. This time it worked out; but once you allow politicians to run about fixing broken industries with public money, all sorts of bad incentives are created. There is the bad incentive to be a Rick Wagoner, and wait to be saved. There is the bad incentive for the bailers-out not to be tough and commercial, but to be political instead, in order to get votes. In the spring of 2009 Obama wasn’t over a barrel for the electoral votes of Michigan and Ohio, but a future president might be. Rattner alludes to these problems, but his book is about the specific case, not a general case.

A car company rescue also gives the politician a chance to be tinkerer-in-chief. Obama isn’t a car guy, but I can think of politicians who would use the opportunity to push the Chevy Volt, or to go beyond it. Rattner is blunt about the Volt: it costs $40,000 to make, and it competes with cars that cost half as much. He writes, “There is no scenario under which the Volt, estimable as it may be, will make any material contribution to GM’s fortunes for many years.”

In his epilogue, Rattner compares the auto rescues, which resulted in two viable companies, with Obama’s “stimulus” package, which cost 10 times as much and spent the money “without anything like the rigor that private equity or venture capital investors apply.” He says that Americans “we will be disappointed by how little lasting benefit we got for those dollars.”

That is so. It is also a low standard for measuring government spending.

Libertarians still have strong reasons to oppose corporate rescues generally. But each case has its own facts, and sometimes a bad idea delivers good results.

I’m glad it came out well — I guess.

/p