Politics & Policy

Auto-Bailout Casualties

The Obama administration insisted on closing too many dealerships.

In the Obama auto bailouts, jobs were not all created equal. The administration moved heaven and earth to save the jobs and generous benefits of General Motors and Chrysler workers who belonged to the United Auto Workers, ripping up the contracts of bondholders and secured creditors to give the UAW an enlarged stake in the new companies. “As a result,” notes Amy Payne of the Heritage Foundation, “even after the reorganization, GM still has higher labor costs ($56 an hour) than any of its foreign-based competitors.”

But non-UAW workers affected by the bankruptcies were not so lucky. At a former GM subsidiary, Delphi, which manufactures automotive parts, 28,000 UAW workers were paid full pension benefits that GM had promised, but 41,000 other workers were not. As Todd Zywicki, professor of law at George Mason University, testified before the House Oversight and Government Reform Committee: “Had new GM treated Delphi’s UAW and non-union employees equally, the Treasury could have paid $1 billion less for the GM bailout. Instead, some workers became more equal than others.”

And perhaps no workers were less equal in the bailouts than the employees of GM and Chrysler dealerships. About 100,000 mostly blue-collar jobs — a number approaching the total work force of GM and Chrysler, according to the Cleveland Plain Dealer — were put on the chopping block by “Team Auto,” the Obama administration’s auto-bailout task force, which insisted on extraordinarily rapid closures of auto dealerships during the government-organized bankruptcy proceedings.

#ad#Mitt Romney’s new ad highlights the impact of the closures on one dealership in Lyndhurst, Ohio. The owner, Al Zarzour, speaks of having to lay off “30-some” employees when his Chevrolet dealership was put on the GM closure list in 2009.

Obama supporters as well as right-leaning Washington Post blogger Jennifer Rubin cried foul, claiming that the dealer closings were necessary for the automakers’ viability and that virtually no dealership jobs would exist had the auto companies gone into a normal bankruptcy. But an acclaimed new book, Bailout, by Neil Barofsky, former special inspector general for the Troubled Asset Relief Program (TARP), shows that the first half of this critique is false and the second half highly tenuous.

“Is Romney saying that in a ‘managed bankruptcy’ these dealerships wouldn’t have closed?” asks Rubin. Romney hasn’t responded yet, but Barofsky argues forcefully that the Obama administration pushed for many more closures than bankruptcy and restructuring experts deemed necessary. In Bailout — other aspects of which have been praised by the Huffington Post, a notably progressive outlet — Barofsky paints a far more devastating portrait of the Obama administration’s arbitrary dealer closures than does the Romney campaign, whose attacks on them have been relatively mild.

Contrary to the administration’s claim that the dealer closings were entirely GM and Chrysler’s decisions, Barofsky writes that Obama’s “auto team had pressured the companies to close the dealerships” more rapidly and in greater numbers than the firms had wished. As a result, more than 2,000 dealership agreements were terminated within a few months in 2009.

Barofsky concludes that “relatively little thought had gone into Treasury’s determination that the dealership closings had to be immediate.” He reports that after “interviewing many of the same experts Treasury had consulted,” his group of auditors “found remarkably little support for the auto team’s determination that the viability of GM and Chrysler depended on their closing so many dealerships so quickly.”

#page#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.”

#ad#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.

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