Clowns of Industry

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This June, President Obama began celebrating the success of his auto industry bailout. In a speech at an Ohio Chrysler plant, he bragged that he had saved the industry from collapse. Under a brilliant "tough love" plan engineered by his Auto Industry Task Force (Team Auto), GM and Chrysler are turning a profit, hiring more workers, retooling for a "new age," and paying back TARP money — all at very little cost to taxpayers. Now, they are patting themselves on the back and taking bows before cheering media — for brashly spending over $80 billion in a hamhanded attempt to save two companies whose combined market capitalization was less than $10 billion. I can think of only one profession for which clumsy jokes, tricks, and illusions earn praise.

 The president's claims are hopeful pronouncements and disingenuous statements. GM and Chrysler are not hiring and paying back TARP money on the scale of his victory manifesto. The Washington Post (“The Fact Checker”), usually a staunch supporter of Obama's policies, said of the self-congratulatory speech, "What we found is one of the most misleading collections of assertions we have seen in a short presidential speech." President Obama's boasts of recovered TARP money (e.g., Chrysler has paid back "every dime and more") identify payments on TARP loans made only during his administration, but the reality is that to date only $39.61 billion of the official $80 billion TARP total has been repaid. Much of the rest is unlikely ever to be recouped by taxpayers, especially if GM goes broke awaiting the huge, future demand for green energy cars foreseen undauntedly through the rose-colored glasses of Team Auto. The bailout has been a circus run by elite bureaucrats to rescue unions more than auto companies and nudge us to an imaginary green economy more than to real prosperity. 

And the tinkering may make meaningful success permanently elusive. What is the long-term viability of an industry hastily restructured by a task force with no auto industry experience? What is the so-called new age, and when is it to arrive? Where is the brilliance in concocting what certainly must have been among the costliest and most insidious of bailout solutions?

Charged with overhauling the US auto industry, Team Auto was composed of cabinet members and Obama administration officials with extensive auto industry, well, inexperience and ineptitude. Headed by investment banker Steven Rattner, it included experts in energy, transportation, commerce, environmental protection, climate change, and “economics.” The team's industrial expertise resided in Ron Bloom, a former United Steelworkers Union advisor. According to the Wall Street Journal, team members underwent "a crash course in the myriad woes plaguing the US auto industry" and "spent days trying to understand the complexities of the hundreds of companies that supply the car companies with axles, seats and other parts."

Days! Imagine. No wonder they are patting themselves on the back. They learned in days what thousands from the executive ranks of American industry evidently failed to learn in decades — an extraordinary achievement, even for whiteface clowns. Unfortunately for taxpayers, the crash course didn't include a tutorial on Ford's recent turnaround. Ford not only succeeded, it succeeded with private capital and restructuring costs of less than $12 billion. And it succeeded quickly enough that, two years later, it did not need a bailout. To save GM, anyone but a Team Auto wizard might have chosen a similar approach. Then, by recruiting a CEO such as Ford's Allen Mulally and paying the restructuring costs from the $13.4 billion already allocated by the Bush administration, GM could have been rescued with money left over.

A successful GM bailout using $13.4 billion is barely commendable — after all, Ford did it with less. I would expect a truly qualified team to do it for much less. But with incompetence exceeding that of GM management and intransigence exceeding even that of its labor unions, Team Auto couldn't find a solution under $65 billion, which is $5 billion more than GM's highest market cap of $60 billion, reached back in 1999. Brilliant! And they are bragging about it. Perhaps,in a lapse of frugality, the madcap buffoons rejected even more wasteful, corrupt, and extravagant gags.

The recent ascent of the automobile industry is more a descent into the new "too-big-to-fail" abyss. Team Auto pranksters usurped the normal bankruptcy process, cobbling together daffy, impromptu rules to reward two American auto companies and the UAW for decades of foolery and an Italian auto company for its "valuable technology," while punishing legitimate creditors, private bidders, and taxpayers. The rights of creditors, including holders of secured bonds, were subordinated to those of the UAW. Private bidders for GM or Chrysler could not be found. That is, Team Auto could not find investors who would match its political favors, bankruptcy manipulations, and financial pratfalls. For example, GM was allowed to write off, in future years, up to $45 billion of past losses (an under-the-table write-off worth up to $15 billion), and more than $4 billion of Chrysler's debt was immediately forgiven (also under-the-table). All those years of losing money finally paid off — in a financial sleight of hand amounting to $19 billion, ratcheting the bailout total to $100 billion.

After more than two years of "tough love" spending, nine of the 12 vehicles on Forbes' "The Worst Cars on The Road" list for 2011 were from GM and Chrysler.

Team Auto had no trouble gaining Fiat’s cooperation, regaling the company with managerial control and 20% ownership of Chrysler, along with the ability to increase its share of the property to 51% and beyond. And the largess continued. A call option was granted allowing Fiat to buy up to 16% of Chrysler stock at a reduced price, provided Chrysler paid back at least $3.5 billion of the remaining $7.6 billion owed to the Treasury Department. At the time, private banks were afraid to lend Fiat more money. But audacious Team Auto member Steven Chu (Secretary of Energy) pulled a low-interest Energy Department loan out of his green hat for Fiat to develop fuel-efficient vehicles. Magically, it was just the right amount, $3.5 billion. As a result, Fiat will develop a green economy car for Chrysler. It is expected to get 40 mpg — almost as much as the economy car I bought in 1978. Such was Team Auto's assessment of Fiat's advanced technology. Unfortunately, its opinion of Chrysler automotive designers was lower than the demand for Fiats.

The call option giveaway and the sordid $3.5 billion Energy Department loan to pay the Treasury Department loan enabled Fiat to accumulate a majority stake in Chrysler (up to 57% by the end of 2011). Thus, Team Auto rescued Chrysler, an American company currently worth $5 billion, at a cost of $6.44 billion (the $4 billion cancelled plus the amount owed to the Bush administration) and converted it into an Italian company in the process. More brilliance, more bragging.

Splurging money on companies does not create pressure to build a quality product that people want. After more than two years of "tough love" spending, nine of the 12 vehicles on Forbes' "The Worst Cars on The Road" list for 2011 were from GM and Chrysler. None, it should be noted, were from Ford. This is an indicator of the malfeasance of Team Auto's intervention and is fraught with an irony appreciated, no doubt, by sad clowns everywhere. Equally important, it does not bode well for the sustained profitability needed to repay taxpayers. Nor does GM's market valuation. To recover the remaining GM bailout money, it is estimated that GM's stock price must reach $55 a share. Opening at $33 a share last November in Team Auto's IPO, GM closed at just over $29 a share on the day of president Obama's speech.

That GM and Chrysler have shown recent quarterly profits is clearly a favorable development. Nevertheless, the bailout hatched by Team Auto is an appalling mockery. With $100 billion, a group of professional clowns could have produced a quarter or two of profit after a run of two years, probably doing so without giving Chrysler away to a foreign automaker. But they would have had the decency not to brag about the tax money squandered. When I hear President Obama and Team Auto members boasting of their success, I hear a loud, obnoxious clown horn — much like the one I imagine they used to end each tutorial session and to inaugurate each brilliant idea they came up with in formulating the scam.

Ron Bloom boasts that the bailout will "ensure America wins the future." Steve Rattner is peddling the book he wrote about his experience and crowing, "The bailout was a bargain for taxpayers." Obama is so enthralled by his self-declared success he plans to use it as a centerpiece of his 2012 campaign. I imagine that as the election nears, there will be a highly publicized ceremony awarding Team Auto for its sterling performance. Task force members will arrive at the White House and, one by one, with grotesquely painted faces, ruffled collars and pointed hats, clumsily but endearingly emerge from a single, little green economy car.




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