Subscribe in a reader

Or enter your email address below to subscribe by email to the ExodusMD Blog! You'll receive notice when a new post is written.

GM and Chrysler: RIP


    The government's handling of US automakers continues to illuminate.  Far from recognizing the roots of the demise of these former American icons, GM and Chrysler, and repairing them, they have taken actions that only ensure their continued failure but now at ongoing taxpayer expense.  GM and Chrysler, once powerful and dominant corporations, symbols of American preeminence, have now been reduced to, in effect, federal job programs.  The contempt of the governing class for private enterprise could not be more manifest than in its conduct towards these two former titans through the years, its gradual but unrelenting asphyxiation of them to serve political ends and, particularly, to payback constituents.  There is blame, of course to go around, but as is so often the case, it is government policy that lies at the center of the storm. 
    We have seen over and over how it is the heavy hand of government, of political aristocrats in Washington, with generally limited knowledge (to be kindly) of the private sector, earnestly endeavoring to engineer outcomes, leading to disaster.  Look no further than the current financial calamity over affordable housing. 
    When politicians decided to force banks to make faulty loans to unqualified borrowers for the perceived social good of expanding minority homeownership, they bequeathed us instead the sub prime mortgage crisis, from which we are still reeling, with unemployment approaching 10% and rising. 
    Then there are the innumerable government obligations that cannot possibly be met, most particularly Medicare, Social Security, and Medicaid, programs that hurtle at breakneck speed toward financial insolvency with nearly $100 trillion in unfunded liability and virtually empty trust funds supporting them.
    Then we have the CAFÉ (corporate average fuel economy) standards (begun in 1975) by which Washington imposed mileage per gallon rules on US automakers, initially in response to the Arab Oil Embargo of 1973, and then, more and more, to satisfy the UAW (United Autoworker), green constituents, and achieve the fantasy of energy independence.  Compounding this, the Big Three were forced to manufacture the econocars in UAW plants here in the US at a prohibitive cost ("two fleet rule") rather than import them from abroad where they actually make them for a profit (at non-UAW plants).  The current fleet average of 27.6 mpg already requires the Detroit Three to sell pixie cars at a loss; they have low profit margins and have to be made in costly UAW plants here in the US.  GM is forbidden to build such vehicles outside the country where UAW would have to compete with non-union plants, thereby protecting its non-competitive union wages and benefits in a globalized economy.  It is the (despised) SUVs and pick-up trucks that make money for American car companies.    
    Now Obama has committed the nation to a fleet average of 39 mpg by 2016, which will make it all but impossible for the Big Three to sell the kind of cars that generate revenue.  We will have, in other words, bankrupt but subsidized companies (two out of three; Ford remains viable, but who knows for how long, competing, as they will, against the government backed companies) making cars that Americans don't want and selling them at a loss.  Indeed, Obama Cars will make its UAW and Sierra Club patrons squeal with pleasure, but the American taxpayer will pay for the bumpy ride. 
    George Bush had the opportunity to put GM and Chrysler out of their misery back in December (at great savings for the country) by allowing them to go into bankruptcy.  There, bankruptcy judges would have dealt properly with bloated and prohibitive UAW contracts.  Perhaps, they would have even gone so far as to suggest Congress consider repealing CAFE standards altogether or at least abandoning the ridiculous "two fleet rule," which has been so damaging to American car makers, and an obvious giveaway to the UAW.  But the statist Bush could not withstand the political pressure of allowing the ill-fated car companies to fold.  Instead he (foolishly) authorized  $17.5 billion in TARP money to be used to delay the inevitable, perhaps so it could not be said that the two automakers failed under his watch.  All of it now, in any event, is down the proverbial drain. 
    But by prolonging the agony and allowing them to fold under Obama's watch instead, Bush squandered the opportunity for the two companies to reorganize themselves under favorable conditions more likely to ensure future profitability.  That he used TARP money to do this shows the lawless nature of his administration, for TARP money was never intended for this purpose.  Further, with Obama at the helm, a dyed-in-the-wool leftist ideologue with no affection for the free market and capitalism in general, the focus of any restructuring would not have been to create commercially viable enterprises, but to pursue a political agenda and particularly to pay back constituents (UAW, Sierra Club, et al).
    But if the political class who, God-like, brought the CAFÉ standards into being in the first place is that worried about energy independence, reducing oil consumption, and battling the global warming demons of legend, than simply tack on a gas tax.  It is more direct and honest and doesn't oblige carmakers to bend themselves into pretzels trying to accommodate federal regulators every time they roll out a new vehicle.  If there is demand for little green cars and hybrid plug-ins there will be no need for mandates.  No need for taxpayer subsidies to bribe Americans to buy little green putt putts. 
    Furthermore, CAFÉ has done nothing to curb oil imports or reduce energy consumption.  It merely compels American carmakers to make econocars at a loss, subsidized by the more profitable SUVs and pickups at which American companies excel; not to mention taxpayer subsidies of as much as $7,500 for GMs next putative wonder and salvation, the electric Chevy Volt (coming in at a price tag of $40,000).  It is a policy that forces American companies to make small cars at prohibitively expensive UAW plants rather than compete against cheaper foreign workers for the political (not economic) purpose of preserving UAW jobs at non competitive rates.
    It is also revealing to note that according to the Treasury's own “viability summary,” only nine of GM's top 20 profit contributors were cars, the rest being SUVs and trucks, unpopular of course with Congress and the green lobby.  But one wonders what is wrong if Detroit shifted into making chiefly the larger vehicles Americans like to buy and leave the smaller fuel sippers for the foreign transplants who, coming as they do from nations where the price of gas is much higher, have developed expertise in producing fuel efficient vehicles, a kind of natural diversification of the auto industry?  Why force Detroit to continue making cars they have less expertise in and at a loss?  
    But no, Bush punted, at the tail end of a deeply flawed presidency, utterly baffled already about what to do with the mortgage crisis and unable to summon the political moxie to take on the UAW and their Democrat allies in Congress; perhaps he no more understood the roots of the Detroit collapse than he understood the causes behind the mortgage debacle.  In any event, he found it easier to simply burn through $17 billion of the taxpayers' money instead and avoid the hard questions. 
    Obama and the Democrat Congress of course have no intention of doing the necessary spade work, and gave their UAW allies (yes, the same UAW that, combined with government policy, all but destroyed the two auto giants to begin with) all that they wanted (as junior creditors who were moved ahead of senior secured bond holders, in defiance of established bankruptcy law) including a 55% stake in Chrysler, even as they stiffed senior secured bond holders for 29 cents on the dollar.  This in itself is yet further evidence of an administration not just oblivious to the reality of running a profitable company, but willing to break laws to serve political ends.  It is also particularly galling for Obama to chastise bondholders with $6.9 billion in loans to Chrysler as "speculators" for refusing Treasury's offer of $2 billion.  Many of the so called "speculators" turn out to be teachers and cops (including some from Indiana), public employees basically who had invested some of their retirement funds in Chrysler bonds.  Indiana Treasurer Richard Mourdock reported that his state's police and teacher's funds had lost millions and would not invest in companies receiving federal money in the future based on the Obama administration's behavior; it is senior secured creditors who should be first in line not last in any bankruptcy proceeding.  But then this is what happens when government treats contracts with contempt. (Fiat, the US, and Canada, by the way, received minority shares in "New Chrysler" equity.)  Indeed, no less an authority than the Constitution prohibits the state from interfering with the payment of debts; it also requires “uniform law” when it comes to bankruptcy. 
    How will GM and Chrysler or other companies with special relationships with the government raise capital from future investors who now fear possible illegal confiscation of their assets?  While engaging in political payback, the President has dealt a severe blow to the sanctity of contracts upon which normal business interaction is based.  While perhaps saving some UAW jobs he has probably unwittingly caused the loss of countless others by treating with impunity established law. 
    For GM, it has always been about politics far more than profit and loss.  Every time it planned to close a plant or terminate a dealership it had to contemplate the political fallout; whenever it introduced a new model, it had to agonize over the reaction of federal regulators regarding fuel standards.
    Well, the inevitable occurred.  GM and Chrysler went bankrupt.  The feds will take 72.5% ownership of GM at a cost of $70 billion, not counting the $12.5 billion to GMAC, the financial arm of GM.  The UAW will receive 17.5% ownership, none of it deserved since it contributed mightily to GM's demise. The outcast bondholders will have to settle for 10% (on a $27 billion claim).
    (None of this, by the way, would likely have occured under standard bankruptcy court proceedings that would have reorganized the company based on economic and financial considerations not political.)     
    The Obama administration says that it will get its money out within five years.  GM would have to be worth $100 billion for taxpayers to get out their 72% share; WSJ points out, however, that GM's highest market capitalization, in 2000, was only $56 billion.  What are the chances of bankrupt GM reaching the $100 billion mark in five years?  Zero.  It is pure fantasy.
    The Obama orchestrated Chrysler deal is no better.  The UAW will receive 55% ownership (mind boggling really) while bondholders will receive the princely sum of 29 cents on the dollar on $6.9 billion, unheard of and in violation of bankruptcy law and the Constitution: the fifth amendment's “takings” clause which holds that no person should be deprived of life, liberty, or property without due process of law.
    And what of America's other auto industry, the 12 foreign or transplant producers making cars in America, with names like Toyota, BMW, Kia, Hyundai, Honda, Volkswagen, Nissan, and others, that together produce 54% of cars and employ 113,000 Americans compared with 239,000 at US owned manufacturers.  Transplants operate under conditions of the free market.  Take home wages at US car companies average $28 an hour, which is on par with $26 at Toyota, $24 at Honda, and $21 Hyundai.  With benefits, the cost per hour average for non-Detroit companies are 44$ compared with 73$ in US companies.  Generous union health care and retirement benefits have made Detroit companies non-competitive.  These “legacy” burdens, avoided by transplants that have come recently, have effectively priced Detroit out of the market and into bankruptcy.
    And so the miserable and humiliating end to the great and iconic American car companies of GM and Chrysler, corporations that have meant so much to the American economy and culture, the creators of such memorable vehicles as the Pontiac GTO and Firebird, Chevrolet's Corvette, Cadillac, and Camaro, the Buick Riviera, Oldsmobile's Cutlass, or Chrysler's Barracuda, the Valiant, Duster, or GTX (and many others), to become instead as bankrupted wards of the state, is tragic indeed.  And particularly so when they come under the command of an individual like Obama, someone who has never run a company, knows little or nothing of the free market, and, perhaps, based, at least, on the company he kept for most of his adult life (and from what he has said and written), has only contempt for it, is quite bitter.
    His ambition to turn the American auto industry into a state subsidized manufacturer of green eco-cars that will not cut carbon emissions, not reduce energy dependence, not change the temperature of the planet, not make a profit nor generate real private sector jobs, and will continue to bleed the American taxpayer, is depressing.  The only saving grace is that he now owns the two companies, and when they continue to lose money and remain non-viable, costing yet more billions for the American taxpayer, at some point he will be held responsible.
    It is also especially deplorable that the two agents most responsible for the demise of Detroit, the UAW and the government, are the ones who have gained the most from its crack-up; they have deflected all responsibility for their roles in the carmakers' demise and have suffered no consequences for their destructive policies.  As in the mortgage crisis, the sinners have escaped unscathed; the perpetrators of  the flawed strategies continue to prosper, amass yet greater power, and walk among us as innocents, wagging their fingers and chastising others; the duplicity and hypocrisy is overwhelming; and the mistakes will surely be repeated.
      There is also a lawlessness surrounding the Obama administration's handling of the car crisis, the abandonment of established bankruptcy protocol to pay back political allies that will produce unwanted consequences when corporations are no longer able to raise capital by issuing bonds to investors who fear government heavy handedness and disregard for their proper claims as senior secured creditors.  But for someone who cares little for the free market and believes deeply in the power of the state, perhaps this is a desired outcome, for it provides yet further justification for even more activist government. 
    And so it is a sad day to see these American giants come to an undeserved end, to see the automakers that have done so much for our economy, that have added so much to our quality of life and culture, indeed gave us the very product, the car, in its myriad and dramatic forms and fashions, that as much as anything has come to define the nation and provide one of its most enduring symbols, reduced to servility and dependence as government appendages, as glorified federal jobs program. 
    For no one can seriously expect GM or Chrysler to emerge from its government based restructuring as solvent and viable, able to compete independently against Toyota, Honda, Hyundai, or BMW, not with the UAW, Obama, and the Sierra Club on their backs. 
    And so, we can say, with sadness that a piece of America, a substantial piece, has died, brought down by the twin evils of a misguided government and its favored union.
    But what dizzying heights they once enjoyed; for the American carmakers were model corporations, economic titans that changed the country and the world.  And who does not look back fondly at the great vehicles they have produced and in fact still produce, despite the burdens that have made them desolate, insolvent, and diminished.  Perhaps in the ashes of their collapse, some good may yet emerge. 


  • Ken Larmore

    July 11, 2009

    Dr. Moss,

    This is a brilliant commentary regarding the illegal actions, and the motives behind them, undertaken by Barry Obama and his corrupt administration. You do a remarkable job at clearly explaining exactly the implications regarding both GM and Chrysler having been overtaken by the U.S. Government. The illegal precedence, with respect to the U.S. auto industry, perpetrated by Barry Obama, et al, is frightening, at best, and stands to further erode the moral compass that I, along with so many Americans, have been taught from birth.

    All the Best,
    Ken Larmore

Add Comment