Hidden victims of the auto bailout

Didn't hate the auto bailout yet? Still weren't sure if it was a net positive or negative for our country at large? Maybe this article will help you make up your mind.

Vicki Denton died several years ago after the airbag in her 1998 Dodge Caravan minivan failed to deploy during a head-on collision in the Georgia mountains. In 2009, a jury found Chrysler responsible for her death because of a manufacturing defect, awarding her surviving son and other relatives $2.2 million.

The family was near collecting those damages on the eve of Chrysler's government-brokered bankruptcy. Now, two years removed from a $12.5 billion bailout, Chrysler Group LLC still hasn't paid the damages, and doesn't have to.

The reason: The company's restructuring allowed it to wash away legal responsibility for car-accident victims who had won damages or had pending lawsuits before its bankruptcy filing. The same holds true for General Motors Co., which discarded the liabilities as part of its own $50 billion bailout and restructuring.

In rescuing the car makers, the U.S. government prevented a potential meltdown of the auto industry and further shocks to the economy. But in the process, it created a wide universe of relative winners and losers. The U.S. Treasury received large ownerships stakes in the restructured auto makers, as did union retiree trusts. Chrysler's banks got some, not all, of their loans repaid in cash, and GM's lenders were fully repaid. On the other side, thousands of dealers, asbestos victims and other creditors received little to no recompense.

Among the creditors who suffered most, car-accident victims represent a distinct mold. Unlike banks and bondholders, this group didn't choose to extend credit to the auto makers. As consumers, they became creditors only after suffering injuries in vehicles they purchased.

Wow. This is pretty disgusting, and the judges who allowed these debts to be erased (both of whom are named and quoted in the article, which deserves to be read in its entirety) should be ashamed of themselves.

Of all the terrible precedents set during the financial and auto bailouts (and there are tons of them, some of which--like this one--we're just now finding out about), this might be the worst I've come across so far. It makes me sick to my stomach that a company can be excused of responsibility for its negligence...simply by becoming even more negligent to the point of bankruptcy. The fact that something like this was explicitly allowed (and in fact endorsed) by our federal government only makes it that much worse.

I was anti-bailout from the get-go, and this sends me over the top. Buy American? No thanks.

UPDATE: A commenter correctly pointed out that Ford did not accept bailout funds, and therefore should not be included in my snarky "don't buy American" conclusion. Fair point. I have much respect for Ford for fixing their own problems. GM & Chrysler? Not so much. Buy Ford.

[Wall Street Journal]

Behind the scenes of the auto industry bailout

In a fascinating piece for The New Yorker, Malcolm Gladwell takes a look back at the ins and outs of the auto industry bailout, nearly two years after the fact. While the Wall Street bailouts have garnered many more of the headlines and a disproportionate amount of public scorn (largely because banks and bankers are easy targets), the auto bailouts were also extraordinarily large, and arguably more complex.

Gladwell's piece is interesting on a few fronts, but his insight into the nuts and bolts of how these bailouts got done is simultaneously intriguing and unsettling. No one man should hold as much power as these men wielded, at any point in time--a sentiment that our Constitution would echo. Gladwell writes,

“Team Auto,” as [Steven] Rattner refers to the group that he assembled to help supervise the bailout, consisted of about a dozen people, some in their twenties and early thirties. They started work in March of 2009. One of the first major issues was whether to save Chrysler. To settle the question, Rattner tells us, Team Auto gathered in the office of Larry Summers, the President’s chief economic adviser. 

The case against Chrysler was that most of the jobs lost by letting the company fail would eventually be offset by gains made by Ford and General Motors, as those companies picked up Chrysler’s old customers. Letting Chrysler fail would make Ford and G.M. stronger. But did the team really want several hundred thousand jobs to disappear—even if the losses were short-term—in the middle of a severe recession? 

Chrysler’s failure would also mean that Michigan’s unemployment-insurance fund, for starters, would need to be bailed out. One of Rattner’s team members made a counter-argument: “Given the uncertainty in our economy, it was better to invest $6 billion for a meaningful chance that Chrysler would survive than to invest several billion dollars in its funeral.” Summers put the matter to a vote. The tally was 4-3 in favor of letting Chrysler die. When the vote came to Rattner, he said that it should live. Summers agreed. Chrysler lived.

It's downright scary to appreciate how close a company was to dying, and how fickle the reasoning was behind its rescue. This is far too much power for a small panel of people to have, especially this type of panel. Keep in mind, the people on "Team Auto" were not elected, nor were they subject to any sort of Congressional approval process. And yet they were charged with the task of making massive decisions on how to deploy taxpayer resources, with the implicit understanding that any recommendation they made would be rubber-stamped by the Obama Administration. That's troubling. It amounts to a Constitutional end-around, and regardless of your feelings about the bailout, the underlying decision-making process was flawed.

To be fair, I've largely been an opponent of bailouts of all types, and that of the auto industry in particular. While I appreciate that the frictional costs of a large company going through bankruptcy can be extremely painful, and that the costs can be highly localized (as in Detroit), I think that the precedent that a bailout sets is extremely dangerous and leads to moral hazard, which can breed even more painful (if somewhat more spread and less obvious) consequences in the long run.

Gladwell's piece is both fascinating and frightening, as we realize just how much power we have entrusted to people we know nothing about (including, in many cases, their names). For an administration that preaches transparency and accountability, this seems not to jive. To have laymen making major decisions regarding the deployment of tax dollars is at best perverse, at worst non-Constitutional and illegal. Kudos to Gladwell for passing along this story.


[The New Yorker]