Final COP Bailout Report: The Lessons Of The Auto Bailout

Edward Niedermeyer
by Edward Niedermeyer

The Senate’s Congressional Oversight Panel, which has been charged with monitoring the TARP program, has released its final report [ PDF] before it disbands next month. Given TARP’s importance in this country’s historical sweep, we’d recommend that everyone at least glance through the document. But, if nothing else, TTAC’s readers should at least check out the section on the Auto Bailout, which not only summarizes the government’s actions, but also points out problems that arose during the bailout as well as problems that could still emerge as a result of the bailout. The “Lessons Learned” portion of the Auto Bailout section is of special interest, and so we are republishing it below the fold. For all of the hot air and ink that’s been spilled over the bailout, the reality is that it was simultaneously a success and a failure. As a purely short-term, cost-no-object effort, it very clearly prevented what could have been a messy collapse in the auto sector. But because the true costs and long-term effects of the bailout aren’t yet known, it’s still impossible to say if that short-term rescue was worth the costs or will even prevent another industry meltdown in the future.

The COP’s “Lesson’s Learned” from the auto industry bailout are as follows:

It is clear that GM and Chrysler were in dire straits in late 2008. Although it is difficult to say whether government intervention was the best option, the TARP funds the companies received provided them with at least some short-term stability. Whether the programs aimed at helping the automotive industry can be called ―successful‖ will be difficult to determine since Treasury has never clearly stated its goals in assisting the companies. To the extent that success is defined as a return of taxpayer money, it remains somewhat unlikely that all TARP funds invested will be returned. Although the outlook is currently much better than it was when the Panel released its first report on the industry in late 2009, certain factors, including the loss locked in by the GM IPO price, must be overcome before taxpayers see a complete return of the money invested.

Even if TARP funds are fully repaid, the government‘s intervention in this industry may have lasting effects. In an effort to reduce the impact of its intervention in private industry, Treasury has consistently stated that it is acting as a ―reluctant shareholder‖ and has committed to maintaining a hands-off approach to management of the companies. This position, however, may have served principally to highlight the difficult role Treasury occupied as shareholder, creditor, and regulator of the companies. Furthermore, Treasury‘s unwillingness to influence management even in its role as a large shareholder may ultimately have put the government‘s investment at greater risk than was necessary. Finally, it is too soon to say what the TARP‘s ultimate impact on the automotive industry, and these companies in particular, will be.

The domestic automotive industry was trending downward before the financial crisis hit and it is unclear whether the TARP will ultimately reverse that trend in the long term. Even if these companies were to become extremely successful in the coming years, paying back the funds invested by Treasury and creating jobs and revenue for the American people, there may be lingering and potentially harmful effects from the programs. The Panel has frequently cited the potential moral hazard if large companies, and the markets in which they operate, believe that they will be rescued by the government if they falter. Although the TARP seemed originally to target only those companies whose financial operations made them a potential risk to systemic stability, the use of the TARP to support the automotive industry suggests that a company may be considered ―systemically significant‖ merely because it employs a certain number of workers. Whether and to what extent these issues become manifest can only be determined as future events unfold.

Edward Niedermeyer
Edward Niedermeyer

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  • Doctor olds Doctor olds on Mar 16, 2011

    highdesertcat- Now, exactly how are the hundreds of thousands of jobs that didn't go away "sucking the life out of our economy"? The fact is there is no "continued" funding of the automakers. wrt GM- Most of the "bailout" money has been repaid or recaptured by the IPO. Worst case scenario, GM stock does not go up in the near term before the remaining gov't share is sold and we lose $9B on the GM deal. Well worth it by any rational analysis, considering the alternative of a complete collapse of all auto making in America for a considerable period of time. Juist letting them go would have cost far more than $9B. The fact is that GM just turned down a $14B loan offered by the government because they don't need it and are well on their way to becoming debt free. The fact is that UAW members make the same or less than the transplant workers. The most significant fact is that GM vehicles are selling great, running away from the competitors already and they are just filling the new product pipeline. You ain't see nothin' yet! Ample proof that your view is shared by a shrinking minority. Good luck with the Tundra- high priced and uncompetitive, Toyota had to shutter their new $1.5B plant due to low demand. You may note they can't even break into the top 10 trucks in sales, far behind all of the domestic pickups.

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    • Doctor olds Doctor olds on Mar 17, 2011

      highdesertcat- I respect your POV as well and agree with you in many ways. Everyone should choose what they want, and we have a lot of great choices in the market today. I am just confused as to why you think GM is defunct. This site is about truth, and the facts I see, and have written, do not seem to support that conclusion. It is undeniable that GM products today are selling well, particularly to retail customers, are critically acclaimed, and the company is generating strong profit right here at home in spite of depressed volumes. IMO, the truth is that GM was well on the way to turning around before the perfect storm of $4 gas in early '08 followed by the GFC which thrust them into the government's arms as the only alternative to liquidation. Their hot new products were developed prior to the collapse and the labor cost structure in place now goes back to the 2007 UAW contract. I would like to remind you though, that not one of us has seen a penny in tax increases to support any of the "bailouts". We may be "owners", but we really don't have any money out of our pockets in the game.

  • Bryan Kauffman Bryan Kauffman on Mar 17, 2011

    yes, it's amazing what scrutiny has been given to the auto industry bailouts while at the same time the banks received very little criticism. The COP has been fair to all those bailed out, especially very critical to the banks. Actually, from a political position, the auto bailouts were done so that the 2 administrations (obama and bush) could claim that punishment was inflicted on all parties involved with a company receiving bailouts. Whereas each bank received on average $50 billion in bailout funds (directly thru TARP, many are receiving billions, even trillions more thru back door FED bailouts) no bank had to endure termination of management, haircuts to shareholders and creditors, and being taken over by a "bank czar" that managed the dismantling of the bank thru receivership. Of course, it was very convenient that the majority of stock and bond holders in the auto companies were not major wall street players but employees and retirees that had purchased shares through company purchase and retirement plans.

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