President Obama’s takeover of General Motors is a disaster in the making. Not only is it bad for GM, it also sets terrible legal precedents and rewards the president’s political allies in a brazen display of political patronage. Taken as a whole, the so-called rescue belies the president’s promise to end politics as usual and undermines the values of the free-enterprise system that has fueled American prosperity.
Last year, GM’s management team argued strenuously that the company could not go through normal Chapter 11 bankruptcy, because no one would buy a car from a bankrupt company, and therefore a bailout was needed. This proved to be a terrible mistake. It was like an individual trying to avoid bankruptcy by going to a loan shark; the federal government has taken a shark-like, extortionate bite.
GM has been forced into a change of ownership by the administration’s auto task force, which was supposedly set up to negotiate a rescue plan but instead has imposed one of its own design. Virtually the first thing it did was to fire former GM chief executive Rick Wagoner. Since then it has done everything it can to impose political control over the company.
What we now face is a nationalized car maker, with the government owning 51 percent of the company and the United Auto Workers (UAW) union holding a stunning 38 percent of shares. Bondholders, who normally have first claim on a company’s assets, receive only 10 percent instead, and the current stockholders get the remaining 1 percent.
Consider that for a moment. The government and the current administration’s political fellow-travelers own 89 percent of an American company. This is a terrible precedent. Just ask the domestic British auto industry. Unfortunately, it won’t answer, because most of it went out of business when the British government tried the same tactic in the 1970s. The government attempted to save a dying domestic industry by nationalization and heavy investment in R&D to produce a “product-led” recovery. That recovery never emerged, because the unions put saving jobs before producing good vehicles (as I detail elsewhere). With the UAW now owning 38 percent of the company, should we expect anything different from GM?
The GM nationalization ignores the lessons of history, and its terms are plainly unjust. The UAW, acting for its members who are former workers and GM pensioners, did indeed represent something like $20 billion worth of GM’s liabilities. So the idea that the union should get an equity stake in return for that is fair enough. However, the UAW is getting three times as much as the bondholders, who represent $28 billion of GM’s outstanding liability. When the bondholders protested, the administration refused to meet with them.
This injustice cannot be dismissed on the grounds that union retirees are poor and bondholders rich. There are over 10,000 GM bondholders, many of them individuals like Chris Crowe, who describes himself thus:
I’m a retired electrician from Denver, Colorado. I’m not rich and I’m not a Wall Street bank. These bonds finance my son’s college tuition and my retirement. I’m actually very concerned about not getting a check on May 15 from my bonds because I need this money to pay my property taxes. When the administration refuses to meet with the bondholders or chooses to wipe them out, they’re wiping me out, and lots of others like me.
In many cases, the union retiree and the bondholder are one and the same. Take, for instance, Gary Thomas, a retired auto mechanic from Kingston, Tenn. He speaks for many when he says:
I spent a good portion of my life working on GM cars and decided to buy bonds in GM because I believed they would be a solid investment for my future. I use the interest from the bonds for everyday living expenses and I cannot afford to see GM go bankrupt. After doing the math, I have realized that if I were to accept the administration’s current offer, I would only have $10,000 per year to live off of. That is barely enough to live a decent life and I doubt anyone would deny that.
What possible reason can there be for the administration to refuse to meet with these bondholders’ representatives after imposing such an unfair settlement? The only one that makes sense is simple political favoritism: rewarding political supporters and punishing private investors.
Britain became the “sick man of Europe” because of the cozy relationship between free-spending government and labor unions. The phrase “I’m all right, Jack” came to symbolize the auto unions’ attitude toward those who suffered by their actions. By the same token, when taxpayers and GM bondholders protest, the UAW can say, “I’m all right, Barack.”
– Iain Murray is director of projects and analysis and senior fellow in energy, science and technology at the Competitive Enterprise Institute.