“Auto bailout/bankruptcy report card” by Spellchek

We on the Right often complain about the lawlessness of President Obama. He has demonstrated numerous times that he is capable of ignoring laws he doesn’t like and modifying other laws (Obamacare) to suit his needs. We often forget that President Obama began his lawless behavior soon after taking office in 2009 when he ignored long established bankruptcy laws with his “bailout” of the auto industry. This past Monday it was announced that the government had sold the last of its share in General Motors, which ends this disturbing chapter in American history. Or, maybe not. With so many other things competing for our attention, this story did not get much coverage in the blogosphere. However, my good friend and operator of the Spellchek blog has covered this chapter of history from the beginning and has done a report card on the Auto-bailout. What follows is a reblog of his post:

Auto bailout/bankruptcy report card

Posted by 5etester on December 12, 2013

Via Fox Business – http://www.foxbusiness.com/industries/2013/12/09/us-sells-final-gm-shares/

The Treasury Department on Monday announced that the government has sold its remaining shares of General Motors (GM) and that losses from the 2009 auto industry bailout total about $15 billion.

But it’s not just the taxpayers who lost billions of dollars in the rigged bankruptcies, autoworker retirees are getting in on the action – http://www.cnbc.com/id/101265411

A federal judge said General Motors is not required to pay $450 million to cover medical benefits for retirees, in a defeat for the United Auto Workers union.

Actually, the Treasury Dept. isn’t telling the whole story on the cost of the auto bailouts. You can reference the latest quarterly report from SIGTARP, which is the TARP auditor, to see the true cost of the auto bailouts was $24.3 billion as shown in Table 2.3.


As of September 30, 2013, General Motors Company (“GM”)
and Ally Financial Inc. (“Ally Financial”), formerly GMAC Inc., remain in TARP.
Taxpayers are still owed $32.5 billion. This includes about $15 billion for the TARP
investment in GM and $14.6 billion for the TARP investment in Ally Financial, for
which Treasury holds common stock in GM and common stock and mandatorily
convertible preferred shares (“MCP”) in Ally Financial. This amount also includes
a $2.9 billion loss taxpayers suffered on the principal TARP investment in Chrysler.
Chrysler Financial fully repaid its TARP investment.

The Treasury Secretary wasn’t entirely forthcoming when he made this statement.

“With the final sale of GM stock, this important chapter in our nation’s history is now closed,” Treasury Secretary Jacob J. Lew said during the conference call.

Not until Ally Financial, formerly GMAC, sells off its $14.6 billion dollar investment in stock will this chapter close – http://www.housingwire.com/articles/report-taxpayers-still-owed-146-billion-ally-financial.

Finally, let’s not forget how the rule of law was ignored in the section 363 bankruptcies. This quote is certainly very long but it thoroughly explains how existing bankruptcy law was skirted and investors got screwed in order to reward Obama’s cronies –http://www.nationalaffairs.com/publications/detail/the-auto-bailout-and-the-rule-of-law.


After the bailouts came the arranged bankruptcies. At first, when the government announced that Chrysler and General Motors would be filing for Chapter 11, the news was received with relief by the market, the companies’ creditors, and everyone concerned for the rule of law. The mess created by the bailout could finally begin to move from the political arena to the legal arena, and so regain some semblance of legitimacy and order.

But it wasn’t long before these hopes were dashed by the government’s management of the process. Instead of a regular bankruptcy proceeding, the Obama administration, working with the automakers, patched together a process without precedent — a bankruptcy combined with a bailout, incorporating the worst elements of both.

Of the two proceedings, Chrysler’s was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the “absolute priority” rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company’s secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a “deficiency claim” — the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.

To make matters worse, both bankruptcies were orchestrated as so-called “section 363″ sales. This meant that essentially all the assets of “old Chrysler” were sold to “new Chrysler” (and “old GM” to “new GM”), and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a “sub rosa plan.” The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.

In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights. As the University of Pennsylvania’s David Skeel observed last year, “selling” an entire company of GM or Chrysler’s size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in 1978 precisely to eliminate this practice.

At first, the fact that the companies’ creditors (and especially Chrysler’s creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler’s secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders’ acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.

Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly. A group of hedge funds that were among Chrysler’s creditors initially objected to the bailout plan that preferred the UAW at their expense. In a now-infamous speech in April 2009, President Obama publicly attacked these investors — who were merely standing up for their contract and property rights — as profiteers, criticizing them for their unwillingness to make the same sacrifices as other investors (but not, of course, UAW members, who received a windfall). In response to this public browbeating from the president of the United States, the hedge funds caved and agreed to the terms. In the end, only one group of Chrysler bond holders — the Indiana state teacher and police pension funds — continued to object. Indeed, they objected at every stage of the process, but the Supreme Court declined to hear their case.

General Motors, too, had issued secured debt during its years of financial turmoil, but these bonds made up a far smaller fraction of the company’s total outstanding debt. And in striking contrast with the Chrysler case, General Motors’s bankruptcy plan left the secured creditors intact, paying them the full value of their claims. From the perspective of bankruptcy law and contract rights, this development was encouraging: The Obama administration did not seek to plunder GM’s secured creditors as it had Chrysler’s. From the perspective of the rule of law, however, this differential treatment might have been even more troubling.

On the matter of secured-bond holders, the cases of GM and Chrysler were functionally indistinguishable — and yet GM’s secured creditors were treated far better than Chrysler’s. The administration offered no public justification for this differential treatment, and to an outside observer, there was only one key difference between the cases: The amount of GM’s secured debt was relatively small compared to Chrysler’s. The obvious conclusion, then, is that the difference in how the government treated the automakers’ creditors was purely a matter of expediency — hardly a justifiable rationale.

Another fallacy is that Ford didn’t partake in the bailouts. Their manufacturing arm didn’t, but their financing arm did – http://spellchek.wordpress.com/2010/12/05/ford-was-bailed-out-by-the-fed-after-all/.

We also can’t leave out the fact that taxpayer bailed out Chrysler is now a majority foreign-owned entity – http://spellchek.wordpress.com/2013/10/13/u-s-taxpayers-bailed-out-foreign-owned-fiatchrysler-now-investing-in-mexico-and-creating-jobs-for-mexicans/. Would that have sold if Obama had been up front about it?

The Heritage Foundation compiled this report that showed the auto bailouts/bankruptcies for what they really were – union payoffs.


No Mr. Lew, this chapter hasn’t closed yet and until we have a chance a decade or so down the road to review what the automakers have done with their get-out-of-jail-free card, we can’t issue any final grades on their report cards.







3 thoughts on ““Auto bailout/bankruptcy report card” by Spellchek

  1. Thanks Jim. Living in Michigan, I have a lot of friends in the auto industry. They’re still in complete denial as to what the real cost of the bailouts were and believe their pensions and healthcare are untouchable. Try to discuss how union leadership wins out with Obama and his crony-corporatism and you get nothing but blank stares. The dues paying schmucks really believe they’re part of the “in-crowd” on the good side of Obama. I have yet to find one who is even aware of the federal judge that ruled against them in the GM pension case. Blissful ignorance.

  2. Comments on how much taxpayers are still out because of the auto bailouts…

    Table 2.3 is out of date… it is from 9/30/2012 and does not appear to account for dividend and other earnings that have reduced taxpayer losses.

    TARP publishes a daily summary report. It is up to date.
    Here is the newest one as of 12/13/2013:

    Click to access Daily_TARP_Update%20-%2012.13.2013.pdf

    The newest daily report accounts for the sale of the remaining GM stock. Ally is lumped in with GM and Chrysler.

    According to it, taxpayers are still out $16.54B in TARP dollars because of the auto bailout. The books are closed on GM and Chrysler now, but not on Ally.

    Taxpayers have earned dividends and other earnings and that has reduced the overall cost to taxpayers.

    Ally, a bank, has done a poorer job of repaying taxpayers than any of the other large bank.

    It is not $24B lost but the auto bailouts is about the worst of the TARP loans and the 1 million+ jobs saved is pure fiction!

    1. AZ,

      The point was to highlight the latest report from the TARP auditor, not what Treasury puts out. You can cherry pick items in virtually any news story you find. That’s your prerogative.

      You also can’t put a statistic on the value of the rule of law when it’s rewritten to suit the administration and its supporters.

      My intent was merely to highlight the fact that the bailouts were not the success story Obama has been peddling.

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