Last night, I had the great pleasure of addressing students at the Georgetown Public Policy Institute. Thanks for having me.

One of the subjects that came up was the federal restructuring of General Motors. One of my distinguished co-panelists, who had been involved in the federal effort, noted that there was really no alternative to an infusion of government funds, given the state of the financial markets at the time. This may well be true. Yet I raised the question, which we couldn’t really get into at the time, of whether creditors had been treated fairly, regardless of whether an infusion of government funds was necessary.

I had in mind David Skeel’s analysis of the GM bailout, which he summarized in the WSJ and in an informative conversation with Russ Roberts:

General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM’s ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there’s a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process. …
The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM’s success in selling a significant amount of stock, reducing the government’s stake, and Chrysler’s repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn’t mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.
But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it’s sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers’ pockets.
The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.
This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets. [Emphasis added]

Note that the difficulty that troubled firms in politically sensitive sectors will have will be attributed to”market failure,” i.e., as yet another reason for the federal government to aggressively intervene in the capital markets.

Steven Rattner offered a reply to David Skeel’s arguments. I’ll let you judge whether Rattner is fairly and accurately characterizing Skeel’s arguments for yourself.