Lipstick On A Bailout, 2.0

Bertel Schmitt
by Bertel Schmitt
lipstick on a bailout 2 0

The U.S. jobless rate just rose to 9.1 percent. Employers added the fewest workers in eight months during May. The housing market is double-dipping. Only 16 month to go until the next presidential election. It’s the economy, stupid. The President has to do something. What does he do?

“President Obama’s visit to a Chrysler plant in Toledo, Ohio, on Friday was the culmination of a campaign to portray the auto bailouts as a brilliant success with no unpleasant side effects. “The industry is back on its feet,” the president said, “repaying its debt, gaining ground.”

If the government hadn’t stepped in and dictated the terms of the restructuring, the story goes, General Motors and Chrysler would have collapsed, and at least a million jobs would have been lost. The bailouts averted disaster, and they did so at remarkably little cost.”

He’s wrong, writes David Skeel, a professor of law at the University of Pennsylvania, in his op-ed piece in the Wall Street Journal. Steele is the author of “The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences” .

“The problem with this happy story is that neither of its parts is accurate. Commandeering the bankruptcy process was not, as apologists for the bailouts claim, the only hope for GM and Chrysler. And the long-term costs of the bailouts will be enormous.”

David Skeel doesn’t buy the story that the bailouts were done at little cost. According to Whitehouse estimates, the bailout will cost the tax payer nearly $14 billion. And that’s a lie, says Skeel.

“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.”

If you or I would take that tax loss under these circumstances, we’d go to jail. GM received a tax holiday for many years. But that’s not the worst of the bailout, says Skeel:

“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.”

It may not just make it harder to borrow when a company is in trouble. It may make it much harder to borrow, period. When the rule of law is set on its head, when senior debt is thrown by the wayside for political expediency, then investing in Russia suddenly looks like a safe investment.

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  • Obbop Obbop on Jun 07, 2011

    Whatever you folks end up deciding, just remember to stay away from MY dumpsters. If the IRS screws me for PAPERWORK reasons I am going to be an EXTREMELY disgruntled old coot.

  • Zackman Zackman on Jun 07, 2011

    The last three paragraphs sum it all up. One word: POLITICS. There is another aspect that I can't quite identify with any factual information at the moment is that it appears or appeared that the people responsible for the entire economic mess, whether in the financial world or in the automotive world in this country are somehow regarded as "golden eggs" that represent the fundamental cornerstones of stability, real or imagined, that must be protected at all costs. Hope that this makes sense in someone's universe, because I can't put my finger on any other reason that I've come across. If not this, then I give up trying to figure this whole thing out and just watch from the sidelines, too far away to render any assistance and just watch the whole thing go down the drain. What's done is done.

  • GregLocock Two adjacent states in Australia have different attitudes to roadworthy inspections. In NSW they are annual. In Victoria they only occur at change of ownership. As you'd expect this leads to many people in Vic keeping their old car.So if the worrywarts are correct Victoria's roads would be full of beaten up cars and so have a high accident rate compared with NSW. Oh well, the stats don't agree.
  • Lorenzo In Massachusetts, they used to require an inspection every 6 months, checking your brake lights, turn signals, horn, and headlight alignment, for two bucks.Now I get an "inspection" every two years in California, and all they check is the smog. MAYBE they notice the tire tread, squeaky brakes, or steering when they drive it into the bay, but all they check is the smog equipment and tailpipe emissions.For all they would know, the headlights, horn, and turn signals might not work, and the car has a "speed wobble" at 45 mph. AFAIK, they don't even check EVs.
  • Not Tire shop mechanic tugging on my wheel after I complained of grinding noise didn’t catch that the ball joint was failing. Subsequently failed to prevent the catastrophic failure of the ball joint and separation of the steering knuckle from the car! I’ve never lived in a state that required annual inspection, but can’t say that having the requirement has any bearing on improving safety given my experience with mechanics…
  • Mike978 Wow 700 days even with the recent car shortages.
  • Lorenzo The other automakers are putting silly horsepower into the few RWD vehicles they have, just as Stellantis is about to kill off the most appropriate vehicles for that much horsepower. Somehow, I get the impression the OTHER Carlos, Tavares, not Ghosn, doesn't have a firm grasp of the American market.