AS AN EXERCISE in chest thumping, the Democrats’ convention display of self-congratulations for the GM bailout was extraordinary. In his speech, President Obama mentioned the auto deal three separate times. Joe Biden mentioned it five times, while Jennifer Granholm, the liberal TV host and former Michigan governor, screamed about it — literally — at least 20 times.
The Democrats’ bailout euphoria illustrated their utter lack of reservations about letting government choose both winners and losers in the economy. It was a celebration of intervention by a president who is more than willing to play economic favorites no matter the cost. And it showed that they’ve learned all the wrong lessons from a sad moment in our economic history.
The theatrics were meant to send the message that without Obama’s bailout, the doors to GM would be closed today. That simply isn’t true. Even in the crisis’ darkest days, the debate was whether the right path for GM was to address its financial problems under a traditional bankruptcy, or through a special deal brokered by Obama’s “car czar.” The company could have kept running in either case, just as many bankrupt airlines have done as they address crushing legacy costs and overcapacity.
Even accepting the claim that the government got the workout right — that is, the best possible mix of concessions from employees, debt holders, vendors, and such — any success must be offset by the costs of many recent government interventions gone wrong: $500 million in losses at Solyndra, $50 billion in TARP funds for unsuccessful mortgage programs, $180 billion lost subsidizing Fannie Mae and Freddie Mac. I didn’t hear many shout-outs to those dogs in the Charlotte convention hall.
At best, crowing about the bailout is like a roulette player bragging that he put $100 on lucky 7, and his number came up. What’s missing is the part of the story where he’s down big for the night overall.
But it’s worse than that. In this game the winners, GM’s unions, took their winnings from the pockets of the other players at the table — including taxpayers. GM’s share price, which hovered around $23 for most of last week, isn’t even close to the $53 needed for Uncle Sam to break even. We’re still $15 billion in the hole.
At GM, union bosses and the company’s top brass agreed on one thing: The car czar would give them a better deal. They were right. Old shareholders got crushed. They would have lost big in bankruptcy court, but the government takeover made it impossible for them to realize any long-term upside. Bondholders — who lent to GM under the belief that our legal system would protect them in the event of insolvency — were hung out to dry. The 10 percent equity they received was far smaller than the 17 percent pocketed by the United Auto Workers health care trust, despite holding similar claims. Obligations to the UAW pension will be paid in full.
By the time the Feds stepped in, most of GM’s bonds were held by a bunch of hedge funds — not exactly sympathetic characters. But by denying them their right to control the bankruptcy process, the administration signaled that it will arbitrarily decide who gets bailed out, and who doesn’t. This makes it harder for investors to assess risk in the marketplace. It makes them less likely to commit capital. And it hurts the economy over time.
No one wants to see a once-great firm go bankrupt. But the upshot of GM was this: The government used its power to shortchange bondholders and reward the UAW. In stark contrast, 20,000 nonunion employees at Delphi, a supplier to GM, lost their entire pension plan. GM unions didn’t have to renegotiate contracts — the company’s labor costs are still the industry’s highest — and almost all senior executives kept their jobs. That’s nothing to brag about.
Last week, Bob Benmosche, chief executive of AIG, spoke about his efforts to improve company performance as the government slowly sells the stock it received for bailing out the giant insurer. Benmosche took over after the firm imploded, but he is well aware that the federal government remains his largest shareholder. When asked about politics he replied, “I support the president of the United States, whoever that may be.” This polite dodge made it clear he would take pains not to offend. That is the ultimate danger with the crony capitalism that Obama and others glorified in Charlotte.
A private sector that cowers to the power of politicians is no longer an engine of growth. It is a ward of the state.