IN ANNOUNCING THE GOVERNMENT’S PLAN TO RESTRUCTURE GM, President Obama repeated his intention to keep the government’s hands off the steering wheel. “I have no interest in running GM, “ he said. “They [management], not the government, will call the shots.” But the very route taken to save the company suggests that this is highly unlikely. The Obama deal gives bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts. This is a transfer of property of one group of people to another group that is politically favored, and is not something a bankruptcy judge would normally allow. In the process, it has set aside basic property rights in favor of rewarding the United Auto Workers for the support the union as given the Democratic Party. It’s a remarkable act for a president, who has run only a Senate office and a presidential campaign, to think that he can run a major industrial company.
Does anyone imagine that the government, now that it is a 60 percent owner, would not intervene? The president’s deal was barely on the table before Michigan’s Democratic representative John Dingell was hammering Fritz Henderson, GM’s hapless boss, to stop a planned closure of a transmission plant in his home state. When GM cited 2,000 dealerships that would have to be eliminated, John Rockefeller, the Democratic chairman of the commerce committee, expressed “concern.” Sen. Mark Warner (D-Va.) recently told the media that “Congress had a right and responsibility to ask questions.”
Last November, when President Bush bypassed Congress by diverting $15.4 billion from the Troubled Asset Relief Program (TARP) to the company William C. Durant had built, he initiated a fateful series of events that will plague American capitalism for generations. To date, Obama has upped the ante to at least $65 billion of taxpayer money, but he has taken the auto industry rescue into territory Bush never anticipated. Like any lender, the government would expect to be repaid but that isn’t exactly what’s happening here, since the money is being converted to an illiquid equity stake. The government took more equity than debt because it was concerned that GM couldn’t bear the interest expense. As Dennis K. Berman reported in The Wall Street Journal recently, “The new GM may ‘succeed’ at getting to profitability, but only as much as taxpayers have absorbed tens of billions of losses in upfront equity.”
In short, the government will do whatever it has to-including tilting the playing field with policies to induce consumers to buy GM products-in order to ensure success or at least the appearance of success. In an earlier era this was known as industrial policy. But that is so last century. In less polite circles it’s simply crony capitalism. The insidiousness of the Obama scheme is twofold: As University of Chicago law scholar Richard Epstein points out in “The Sanctity of Contracts in a World of Bailouts” in this issue, when government takes it upon itself to nullify private contractual agreements it finds inconvenient, “the entire system starts to unravel.” In addition, it is very difficult to measure the exact wealth transfer that has taken place in front of our eyes. Nor have we seen the end of it. The unintended consequence of the Chrysler and GM bankruptcies will be to warn every other business in the country that it seeks government bailout at its own peril-and ours.
Are You Ready for the Pay Czar?
THE WHITE HOUSE IS SET TO APPOINT a “special master for compensation” according to news reports, to ensure that companies receiving federal bailout funds are abiding by executive pay guidelines. Kenneth Feinberg, who ran the government’s compensation fund for victims of 9/11, is expected to be the pay czar and will report to Treasury Secretary Tim Geithner. The move comes at a time when numerous and often overlapping efforts to curb pay at financial institutions have arisen in the wake of perceived pay excesses. Feinberg is expected to have wide discretion on how the rules apply and firms won’t be able to appeal decisions that he makes. Let’s see if we understand this. The administration wants to give Guantanamo terrorists the right of appeal but not financial executives employed by wealth- and-job creating U.S. firms.