Bailout Watch 514: Would American Leyland Violate Anti-Trust Laws? And What About the UAW's Tax Status?

Robert Farago
by Robert Farago
bailout watch 514 would american leyland violate anti trust laws and what about the

TTAC Commentator 70 Chevelle SS454 raises some good points about rumors (perpetually perpetuated here) that the feds’ plan to combine Chrysler and GM into “American Leyland.” The clever member of our B&B wrote his analysis in response to John Horner’s comment, which addressed the UAW’s role should they parlay their (allegedly) forthcoming shares in Chrysler and GM into shares in the combination of the two.

100% mergers of competing companies are happening all the time, so I don’t think one entity having major ownership stakes in two competitors is going to run afoul of whatever is left of anti-trust enforcement.

70 Chevelle SS454‘s reply

No. That’s not how DOJ/FTC review of mergers goes. They look to see whether the resulting company would have power over price, or market power. There’s actually a formula that’s used to combine market shares and calculate the resulting company’s market power, called the Herfindahl-Hirschman Index (HHI). Anything with an HHI score above 1800 is considered “highly concentrated,” and is rarely approved.

A merger of GM (~20% market share) and Chrysler (~13% market share) would result in an HHI of about 5200. There is no way in creation that DOJ (Department of Justice) or FTC (Federal trade Commission) would ever approve a merger of GM and Chrysler. The UAW would have power over price in the U.S. auto market.

That said, UAW’s antitrust problems are the least of its concerns, because it has MAJOR tax problems. The simple fact is that UAW is incorporated as a 501(c)(5) tax-exempt organization. That means that the UAW doesn’t pay taxes on income related to its tax-exempt purposes, namely, labor representation. There is no way any independent review of the UAW owning the companies its members work for would ever fly as encompassed within its tax-exempt purpose.

UAW will be stepping over a serious line, and since loss tax-exempt status means you owe tax on all income going back 7 years, this won’t be cheap. Watch for UAW to try to spin off the ownership interest into some face-saving vehicle, but that vehicle to still be controlled by the UAW leadership. They won’t be able to stop themselves from trying to control those companies.

That said, the ONLY reason this is being allowed to happen by Federal regulators is because Obama has instructed them to ignore the law. It will be interesting to see how the False Claims Act lawsuits against the UAW pan out. Of course, Obama will order Eric Holder to oppose the claims, but the courts will see right through his purpose, and as long as the cases aren’t brought in the Ninth Circuit, they will proceed, and Obama will lose. After all, Obama can’t order the courts not to enforce the law, can he?

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  • U mad scientist U mad scientist on Apr 30, 2009
    I hope the bondholders hang tough and push both companies into bankruptcy with no government ownership. The B&B know that I value the domestic auto industry, but I’d rather see GM and Chrysler liquidated and the Tech Center plowed into the ground than for the government to own GM and Chrysler. Here's the hypocrisy of the situation in the US. It's OK to shaft labor in the deal with equity, but it's a crime to short bondholders (or any owners of capital). Also, it's better to have all the employees unemployed that to have the gov broker a reasonable deal. It really goes to show where these people's interests are. - How will the stock that the gov’t owns be accounted? Will it get dividends? If so where do those dividends go? If the government sells those shares will the profit be taxed (I know, it’s absurd, but we live in absurd times)? No, everything should be privatized, like Social Security. I don't hear much lately about how well that plan would've done.
  • JohnHowardOxley JohnHowardOxley on Apr 30, 2009

    @ geeber As it happens, military history and technology is something that interests me even more than cars, and I have backfiles of some magazines in this area which go back 30 years or so. And I can see even for these magazines that there is "less" in them in terms of sustained analysis and writing reflecting genuine critical thinking. So it looks like this may be a general problem of 'dumbing-down'. If, in the current economic climate, I did not have a lot more horrendous disasters about which to worry, I think I would worry a little about this!

  • Namesakeone Actually, per the IIHS ratings, "Acceptable" is second best, not second worst. The ratings are "Good," "Acceptable," "Marginal" and "Poor."
  • Inside Looking Out "And safety was enhanced generally via new reversing lamps and turn signals fitted as standard equipment."Did not get it, turn signals were optional in 1954?
  • Lorenzo As long as Grenadier is just a name, and it doesn't actually grenade like Chrysler UltraDrive transmissions. Still, how big is the market for grossly overpriced vehicles? A name like INEOS doesn't have the snobbobile cachet yet. The bulk of the auto market is people who need a reliable, economical car to get to work, and they're not going to pay these prices.
  • Lorenzo They may as well put a conventional key ignition in a steel box with a padlock. Anything electronic is more likely to lock out the owner than someone trying to steal the car.
  • Lorenzo Another misleading article. If they're giving away Chargers, people can drive that when they need longer range, and leave the EV for grocery runs and zipping around town. But they're not giving away Chargers, thy're giving away chargers. What a letdown. What good are chargers in California or Nashville when the power goes out?