A Brief Incursion Into the Not-So-Big Two

By Steven Pearlstein
Friday, May 29, 2009

Have you heard about the secret office in the basement of the Treasury where officials are checking the political affiliations of auto dealers to ensure that it will be the Republicans who will be cut out during the Chrysler and General Motors bankruptcies?

Or about how the White House is already huddling with lobbyists and members of the Michigan congressional delegation to review designs and sourcing options for the next generation of GM cars?

Or how about the bare-knuckle tactics the government is using (waterboarding has been mentioned) to force a respected bankruptcy judge to strip bankers and bondholders of their property rights and hand them to the United Auto Workers, overturning 600 years of common law and jeopardizing capitalism as we know it?

Well, if you haven't, you almost certainly will in the next few days as General Motors asks a federal bankruptcy court to approve a radical restructuring plan that will leave the government as its controlling shareholder.

The stories, of course, are apocryphal, the criticisms greatly exaggerated. But there is no denying that in the Chrysler and GM bailouts we are witnessing the most ambitious and expensive bits of industrial policy since the early days of the New Deal.

It is hard to recall an instance in which government officials have been as deeply involved in negotiating and, at key junctures, dictating the terms of a union contract or a company's business plan and financing scheme. Nor has so much taxpayer money ever been committed to assure the survival of two private firms. If this were happening in France or Venezuela, we wouldn't hesitate to call it nationalization.

But this is not France, it is not Venezuela, and we have not embarked on a new course for American capitalism. This is simply an extraordinary intervention at an extraordinary moment driven by both economic and political necessity -- economic in the sense that the economy is in no shape to withstand the sudden collapse of General Motors, Chrysler and their supplier network, and political in the sense that their sudden demise would be a mortal blow to national pride and undermine other vital recovery efforts.

Like Bush v. Gore, the auto bailout represents a distasteful policy decision that even its authors hope will set no precedent.

As I suggested last year, a pre-cooked, accelerated bankruptcy process was the only realistic way to restructure companies that had been so badly mismanaged for so many years. As is appropriate in a capitalist system, shareholders have been wiped out and lenders forced to suffer for their bad judgment.

There is no denying that the big beneficiaries of the government's involvement are the active workers who will get to keep their jobs and the retirees who will keep their pensions and health insurance. But any fair analysis would also show that the net present value of wage, benefit and job-security concessions agreed to by the United Auto Workers amounts to tens of billions of dollars.

It is also not the case that the workers' gains have come at the expense of bankers and bondholders who had the bad judgment, or the bad luck, to lend money to these companies.

It is the job of the bankruptcy court to ensure that these financial creditors receive at least as much from any restructuring plan as they would have from a long and messy liquidation -- and they will. But there is nothing in the bankruptcy law, or the common law, requiring a government volunteering to finance a bankruptcy restructuring to divide its largess evenly or fairly between bondholders and assembly-line workers. That is a political choice that properly rests with the government.

In the coming months, the Obama administration will need to resist the temptation to use its newfound control over Chrysler and GM to try to solve the energy crisis, revive the Rust Belt economy and bring an end to income inequality. It will also need to find ways to insulate itself from taking responsibility for how every dollar is spent at the two companies, lest every bonus and first-class airline ticket be turned into a taxpayer scandal.

As it has been up to this point, the Obama administration's role going forward is to be ruthless and impatient about the restructuring of these once-great American companies so they can emerge from the current recession profitable and competitive.

Even before the turnaround has been completed, however, the administration needs to offer a credible exit strategy, including a timetable for privately refinancing the government loans and floating a secondary stock offering to take out the government's equity investments.

It would be great if taxpayers could earn a big profit from their auto investments, but more important is ending this incursion into the private sector as quickly as possible. If President Obama can get most of our troops out of Iraq by the end of 2010, he ought to be able to get our money out of Detroit by then, as well.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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