Mixed results on the Chrysler announcement
5 May
The President’s Chrysler announcement last Thursday produced mixed results.
The agreement among Chrysler, Fiat, UAW, the Administration, and the large banks appears to increase the probability (from almost zero) that Chrysler will survive for the long run, albeit as a part of Fiat. This is clearly a good thing. Is it worth the cost to taxpayers and the broader damage caused by government interference in the economy?
Taxpayers will sustain Chrysler during its restructuring. (Fiat is putting up no cash.) The Administration has committed $8.1 billion of new taxpayer funding for a bankruptcy process that they think will take 60 days, followed by a transition period of unknown duration. I think the final cost will exceed this additional $8 B, in part because I doubt the 60-day timeframe. Since the Administration agreed to forgive about $4 B the taxpayer has already loaned to Chrysler, I am also pessimistic about the taxpayer’s chances of getting back this new $8+ B outlay of funds.
It appears the Administration reached agreement first with UAW and the big bank creditors, and then tried to “jam” the dissident creditors with a tough and possibly unfair take-it-or-leave-it offer. When those creditors rejected the Administration’s offer, the President publicly excoriated them.
The result may be a firm that survives, but there are serious adverse consequences of this process and dangerous precedents for the broader economy:
- Industrial policy —
- Leveraging TARP banks – It appears the Obama team pressured TARP-recipient big banks to forgive much of their loans to Chrysler. If so, they have taken a huge step toward making these banks instruments of public policy rather than private firms. This is a primary fear of “managed capitalism” — political leaders start leveraging one sector to influence another.
- Bypassing the capital structure and bankruptcy process – There is no such thing as a level playing field when the government negotiates with private parties. The Obama team set themselves up as both the arbiter of the negotiation and a participant in it. It now appears that they are trying an end-run around the Chapter 11 process through a §363 sale. If they are successful, they will have interfered with the rights of others who thought they could rely on the traditional bankruptcy structure to protect their interests. The Obama team is introducing significant political risk into future business loans by undermining the traditional bankruptcy process. This makes future loans more expensive for firms.
- Leveraging Fiat to meet new and arbitrary fuel efficiency goals — The fuel efficiency goals mandated by CAFE come from legislative bargaining. The new targets for Fiat (e.g., a 40 mpg vehicle made in the US) were created from thin air by the Obama negotiators. Suppose they had said Fiat cannot make blue cars. Would that be OK? When combined with the apparent cross-sector leveraging of TARP banks, this suggests a scary level of micromanagement and political interference.
- The deal appears to favor the President’s political allies — UAW is part of the deal, “investment firms and hedge funds” are not. The fuel efficiency crowd is presumably happy with the new requirements imposed on Fiat. The appearance the Administration has created, reinforced by the President’s public bashing of the dissident creditors, is that they used carrots with their friends, threatened the big banks with a stick, and then hit the dissident creditors with that stick when they refused the Administration’s offer. If the reality reflects this appearance, then the Administration has abused its power in structuring the proposed deal.
- Demagoguery – The President attacked people for asking to be paid back the money they loaned. These “investment firms and hedge funds” have a legal right and a responsibility to the people whose money they invested.
It is easy to criticize the Administration’s approach and say what they should not have done. It is harder (and more responsible) to say what you would have done instead, and to accept responsibility for the downsides of that choice. If you disagree with what the President did, I challenge you to recommend an alternate path. I will give you five options. To make it hard, please assume the probabilities listed:
- Withhold all additional taxpayer funds. (99% chance Chrysler liquidates by July 1)
- Tell the negotiating team to set a goal (a viable firm without permanent taxpayer subsidies) and a limit on taxpayer funds, and then stay out of the negotiations among private parties. (70% chance Chrysler liquidates by January 1 because the Chapter 11 process drags on and Chrysler’s sales plummet)
- Do what the Obama team did, but don’t use the §363 process to jam creditors and don’t publicly bash those creditors when they dissented. (50% chance Chrysler liquidates by January 1)
- Tell the negotiating team to lead/”help” the negotiations, but strictly instruct them not to pursue non-taxpayer goals (like fuel efficiency), and not to favor UAW over creditors. Use the §363 process if necessary to jam an objecting party, but don’t publicly bash them. (30% chance Chrysler liquidates by January 1)
- Do what the Obama team did, and be willing to add more funds if necessary to keep Chrysler alive. (15% chance Chrysler liquidates by January 1)
Also, please assume that a Chrysler liquidation increases the chance of a GM liquidation by 10-20% through a chain reaction of parts suppliers failing.
These probabilities are my somewhat-wild guesses. If you find yourself arguing with me in the comments about the probabilities, you are missing the point of the exercise. Please assume these probabilities (even if you disagree with them) and tell us what you would do, not just what you would not do.
I will start the bidding by choosing (B).
Related Posts
(best matches are listed first)- Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over
- The Chrysler bankruptcy sale
- Understanding the GM bankruptcy
- Auto loans, part 5: The press forgot to ask about the cost to the taxpayer
- Auto loans, part 2: options for the President
- Dr. Goolsbee gets it wrong on the auto loans
- Understanding the President’s CAFE announcement
- Auto loans: a deadline looms
Stephen Hales
Raising taxes is once more insinuating the government into the economy where it functions typically and primarily to exacerbate or extend the problems it was intended to solve. Politicians seem never to have heard of the law of unintended consequences.
The push for increased fuel efficiency comes from three sources: Shortage of fuel, Carbon dioxide pollution, and dependence on foreign oil. There is no shortage of carbon-based fuels available to this country and within this country (see: http://chiefio.wordpress.com/2009/03/20/there-is-no-energy-shortage/)and, absent more government intervention in the free access to real scientific information, it will (or could)be found that there is no danger to the earth from CO2. Without govt. intervention, the free market would be producing a wealth of efficient inexpensive fuel.
I think the public is far more aware of these facts than the government gives them credit for and consequently they continue to demand the vehicles that the auto manufacturers make. It is the continual finger-poking from the government that causes the problem.
You are probably right, we are getting afield.
I don’t believe that CO2 is a problem now nor that it will ever be. Probably no use in us discussing that.
If I believe that, though (and I do), and that there are plenty of carbon fuel resources available in this country to fuel vehicles of any size which I also believe, then there is no need for Fiat to be in the mix at my expense (they’re not putting up a dime for 20% of their own money for the company). That is, car design doesn’t need to be based on a lack of fuel or a threat to “global warming”. Those two variables are entirely government created (or adopted). Given that I don’t believe in either, therefore, I also don’t believe there any basis for the canard that Detroit is “making cars no one wants” and the implied canard that it’s their fault they’re broke because of this.
If “gas guzzlers” made by Detroit won’t sell in the domestic or overseas market, and that market is critical to Detroit’s success, I suspect they, on their own hook, will begin to build the cars they need to build to stay solvent and successful.
I don’t have a problem with taxes to accomplish the things that are the appropriate purview of the government. I don’t believe the appropriate purview of the government involves restricting free and open creation of energy resources in this country in order to raise the costs artificially to achieve ideological ends.
I think our concerns are fairly close but our beliefs about some of the background issues lead us to different ends. You appear to be more politically sophisticated than I and you feel the political die is already cast about these things. I pray earnestly that you’re wrong.
That is, …Fiat is not putting up a dime of their own money for 20%+ of the company…
Dennis, We are venturing off topic here. Keith had asked us to provide an alternative to the government bailout but I don’t think any action will prevent the demise of the automakers because of the UAW and our lack of an energy policy. I am sure you don’t mean to say that all taxation is unnecessary. In lieu of taxation, the government opted for CAFE standards in the 1970s uncertain whether the market would respond to higher prices. The experience in Europe and Japan seems to show that motor fuel taxation produces favorable market outcomes. I absolutely agree with the author of your link. We have over 16 trillion Barrel of Oil Equivalent of carbon resources available at higher prices. There is no energy shortage there is a cheap energy shortage. If we were to unilaterally exploit our more expensive carbon resources for the production of motor fuels and chemicals then we would be increasing the percentage of GDP for energy production and decreasing energy intensity in the short run and raising the energy content cost of our exports, perhaps worsening our trade deficit. A motor fuels tax on the other hand would be phased in over a period of years allowing market responses. If properly implemented the tax would not reduce consumption of non-fuel items. On the other hand without a sufficiently large tax the next oil shock will batter us again and perhaps cause another recession.
Unlike air pollution and water pollution doing something about CO2 is an intergenerational altruistic act if the worst scenarios are true. The climate science community has been trying to move the date of catastrophe forward to remove altruism from the equation but they have been unsuccessful. The intergenerational transfer of lower CO2 production requires lower consumption today and into the indefinite future. The environmental community has been trying to lay the groundwork for lower consumption by suggesting that we work less. They have even pull quoted Adam Smith on the production and consumption of unnecessary things but Smith was assuming that investment would flow to trivial wants to a degree that has never occurred. We are heading down a road that will further erode private property rights. Because of the Jevons Paradox, carbon leakage, arising from a variety of consumption patterns, will cause government to change land use laws (where we build and live), miles driven and a host of other regulations when carbon taxes or cap and trade fail to work. If this happens at the Federal level then all vestiges of Federalism will die with it. Socialism has always died on our shores as it drifted across the pond. Now it is coming with a thousand gentle and soft cuts to the market I am sure the market is feeling a tingle up its leg, Chris Matthews are you listening.