Auto Restructuring Plan

Being in the political arena is a double edge sword if you have a conscious. Too often you have to translate political prose into bottom line reality and then somehow have to convince your own people what that means to them because the political prose is so dang pretty and deceptive...the snake in Eden concept.

It is kinda like a joke being told by a group of tuxedo clad people at a cocktail party, and the only people who don't get it are the people at the end of the punch line.

The facts of this restructuring represent that kind of joke.

Chrysler Restructuring Plan a Power Grab
By Robert Robb

The proposed end games for General Motors and particularly Chrysler illustrate why government shouldn't have gotten involved in the first place.

It's worthwhile to begin with the broader picture. Americans used to buy about 17 million new cars and trucks a year. Now, we're buying less than 10 million. That, of course, puts considerable stress on manufacturers with weaker products or financial structures.

How many new cars Americans will want to purchase in the future is unknown. But there can be a high degree of confidence in this: however many it is, someone will sell them to us.

Moreover, they are likely to be produced in the United States. A majority of cars sold by foreign manufacturers in the U.S. are actually built here.

So, why should the federal government care who it is that sells us our cars? There are two rationales offered. First, to preserve an "American" auto industry. Second, to preserve "American" jobs.

The proposed Chrysler restructuring gives the lie to both rationales.

Under the Obama administration's proposal, Chrysler would, in essence, be given to Fiat, an Italian company, to operate.

So, how is an Italian car manufacturer operating in Michigan any more "American" than a Japanese manufacturer operating in Kentucky?

And why should the federal government give a market preference - through taxpayer financing and warrantee guarantees - to Italian cars produced by American workers in Michigan over Japanese cars produced by American workers in Kentucky?

The Obama administration's proposed restructuring is more than just unjustified, however. It dangerously undermines the rule of law, as explicated so beneficially by Friedrich Hayek in his classic, "The Road to Serfdom."

The essence of the rule of law, according to Hayek, is that what the government will do is known to all economic actors in advance. That government will not act arbitrarily in specific circumstances to favor some economic actors over others.

Chrysler has $6.9 billion in secured debt. Under the law, secured lenders have the first claim on the assets of the debtor in the event of non-payment.

The Obama administration is attempting to muscle past this law. Under its proposal, the health care trust of the auto workers' union, an unsecured creditor, would forgive 57 percent of what Chrysler owes it, and receive 55 percent of the company's equity in exchange. The federal government would forgive about a third of what it would loan Chrysler and receive 8 percent of the company's equity. Fiat would pay nothing for its 20 percent initial ownership.

The secured creditors, with the first claim on Chrysler's assets, were asked to forgive 70 percent of what they are owed and receive nothing in equity. When they refused and forced the company into bankruptcy, they were excoriated by Obama - a shameful act by a president who pledged to uphold the law, not make it up as he went along.

The proposed GM restructuring is equally lopsided. The union trust would forgive half of what it is owed and receive 39 percent of the company. The government would forgive half of what it is owed and receive 50 percent of the company. The other private lenders, in this case unsecured, would forgive 100 percent of what they are owed and receive just 10 percent of the company.

In his recent press conference, Obama said he had no interest in owning or operating car companies. Until this point, I was willing to accept Obama at his word, while fundamentally disagreeing with his economic policies.

Given his actions, however, it's hard to credit his disclaimer in this instance.

These proposed restructurings are power grabs, pure and simple. The positions of lenders are eviscerated to give control to the union trust and the government. The emergent companies are given market preference through taxpayer financing and government warrantee guarantees. All to serve no true national purpose.

Intestinal Fortitude

Wow. This one got me thinking. However much I hate all the bailouts, would I actually agree to putting my money where my mouth is?

This concept definitely requires a gut check.

Should Tennessee refuse bailout funds earmarked for the state?February 3, 2009 by Ken Marrero
What a difference an hour or two can make.

This morning I attended two meetings. The first featured WTN talk show host Ralph Bristol from Nashville’s Morning News and the second featured Jason Mumpower, the GOP Majority Leader for the TN House. The bailout and the Government’s role in influencing the lives of citizens via dispensing cash was a topic at both meetings.

In the first meeting, Bristol addressed Mitch McConnell’s plans to impact the US mortgage market. Linking to the Fox News story, Bristol noted,

McConnell on Monday demanded an amendment to President Obama’s “economic stimulus” package to give government-backed, 4% loans to homeowners – any credit-worthy borrower, including those who are seeking to refinance their loans. McConnell estimates it will save the average homeowner $466 a month — $5,600 a year, or – over the life of a 30-year mortgage — $167, 760.

He went on to say even though he stood to personally benefit from such a proposal he opposed it on principle because it was wrong for Government to be involved in the mortgage industry in such a fashion. It was little more than an appeal to voters to support him and his party because they were promising to impact citizen’s lives in ways the Constitution did not allow for. He added that until those who did not stand to benefit from a measure could vote for it and those who stood to benefit from a measure could vote against it - both votes on principle as opposed to personal benefit - the country would be at the mercy of whichever politician or political party promised the most. It was the general consensus of the meeting that sort of governance was currently the norm and there was little confidence, human nature being what it is, such tactics by Government could be stopped.

In the second meeting, Leader Mumpower mentioned Federal Bailout money in the context of how it might impact Tennessee’s state budget. Mumpower said he had some concerns about bailouts and noted Governor Bredesen might delay releasing his budget proposal until after it was clear how much money Tennessee was scheduled to receive. During the Q&A session, I asked Leader Mumpower what discussion the GOP caucus might have had about simply refusing to accept bailout money; sending it back instead on general principle. Mumpower responded the GOP Caucus had not had substantive discussions on the matter and that budget conversations would be upcoming but that there were those in the caucus who shared that sentiment.

After the meeting broke up a reporter for the Memphis Commercial Appeal approached me and asked me what my thoughts on the idea of refusing bailout money were. I responded that until people were willing to do the right thing regardless of personal cost, few substantive accomplishments would be realized. Those people who believe bailouts and faux Stimulus Packages are wrong have an obligation to back up their words with their actions or their words could rightly be questioned. The reporter noted that he had asked two elected representatives, also in attendance, to comment on the idea of refusing the money. He noted one simply laughed and walked away while another said if constituents found out that sort of money had been turned down when it could have been used to improve their district there would be trouble. These were Republican lawmakers. One would guess of the more conservative bent.

It’s not an outrageous proposition. Haley Barbour is considering it for Mississippi. So is Mark Sanford in South Carolina. Predictably, there has been a knee jerk reaction against the idea, with no discussion of the idea’s merit. Hopefully, the issue will get a fair consideration and airing both in the public square and in Legislative Plaza. It’s time to stand up for what we believe. If bailouts are bad, then so is taking bailout money. If bailouts are a good thing, then let’s have bailouts for everyone and not just a few. I’m curious to see what discussion this will bring to the Hill. Stay tuned …