Auto-Bailout Casualties
The Obama administration insisted on closing too many dealerships.


John Berlau

In Rubin’s critique of Romney’s ad, she asks, “Do Republicans actually believe that GM didn’t need to reduce costs and capacity?” She seems to be unaware that dealerships, which basically have franchises from automakers to sell vehicles, impose no direct costs on the car manufacturers. “Auto companies don’t pay their dealers anything directly,” as Obama’s auto-bailout czar Steven Rattner notes in his book, Overhaul.

Rattner adds that “floor-plan loans” to dealers, such as the “line of credit” Zarzour refers to in the Romney ad, are of little risk to automakers. Rattner writes that “the historical loss rates on floor plan had been close to zero,” because “most dealers are personally liable for floor-plan loans” (emphasis in original).

So why close so many dealerships so quickly? Rattner argues that “every industry expert agreed that having fewer, more productive dealers results in higher total sales and lower marketing expenses for an automaker.”

But, Barofsky writes, although experts agreed that “dealerships should be reduced over time, there was substantive disagreement about where dealers should be closed and how quickly it should be done.” In particular, he recalls, several experts consulted by his office disputed that any rural dealerships needed to be closed, citing the “distinct advantage that GM and Chrysler had in those areas over foreign competitors.”

Barofsky explains that GM appeared to agree. Initially only 18 percent of the dealership closings it targeted were in rural areas. But “that number jumped dramatically,” he writes, “after Treasury directed it to accelerate the closings, with rural dealerships making up nearly half the dealerships slated for termination.”

Given this evidence, it is correct to argue that many dealers would have fared better if GM and Chrysler had gone through a traditional, court-approved bankruptcy along the lines that Romney advocated rather than through the politicized bankruptcy that Obama’s team put together. At the very least, it would probably have given dealers like Zarzour more time to make arrangements with GM’s competitors, minimizing job losses.

PolitiFact reports that after the dust settled, Zarzour became general manager of a Mitsubishi dealership. A traditional bankruptcy could have laid down an orderly process for his old Chevrolet dealership to transition to Mitsubishi sales.

Meanwhile, the Obama administration, as I noted on NRO last year, continues to overestimate the number of jobs “created” by the bailout, shamelessly including jobs at foreign auto dealerships such as Zarzour’s new shop and at the domestic plants of foreign manufacturers. But Ohio governor John Kasich points out that, of the 73,000 jobs created in his state since 2011, only 700 were “direct jobs” in auto manufacturing. PolitiFact, which examines campaign claims, largely backs up Kasich on this matter.

And then there are the jobs not created and businesses not opened because of the shabby treatment of GM’s bondholders and Chrysler’s secured lenders. The Obama administration designed a restructuring that disregarded two centuries of bankruptcy precedent to give disproportionate ownership stakes to the UAW and, in Chrysler’s case, Fiat.

George Mason’s Zywicki summed it up eloquently in the Wall Street Journal: “By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation.”

So it is perfectly legitimate to spotlight those who have fared worse because of the auto bailout. There are many victims of the government’s meddling in the auto industry, and their stories have yet to be told.

— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute. Mark Beatty is a research associate at CEI.