American Missive

[Barack Obama] says: “If the Japanese can design (an) affordable, well-designed hybrid, then, doggone it, the American people should be able to do the same.” Yes they can — if the American manufacturer can do what Toyota does with the Prius: Sell its hybrid without significant, if any, profit and sustain this practice, as Toyota does, by selling about twice as many of the gas-thirsty pickup trucks that the president thinks are destroying the planet.”
—George Will, May 7, 2009.

ATLANTA— I have been tracking the government’s bailouts of the automotive industry with a repressed horror.   The Obama Administration, having bullied Chrysler creditors into submission, is now conjuring up a plan in which the government and the United Auto Workers effectively take over General Motors, obtaining a 50% stake and 39% stake in the Company, respectively, as a result of the “controlled bankruptcy.”  The Obama Administration has publicly declared they have no desire or intention of running automotive companies.  Yet, strangely, they are doing just that: taking significant owernship stakes in the companies, telling the companies what kinds of cars to produce, and strong-arming all interested parties into either following the Administration’s plans or facing dire consequences.  The Administration’s moves here are completely unprecedented in American history, and some of the maneuvers they have used to bully bondholders skirt the edges of the law. 

Some Chrysler bondholders are already alleging the Administration threatened to smear their good names in the press, if they did not go along with the Administration’s plans.  The beef these guys have with the Administration is that they were secured creditors, and they believe they would have gotten higher recoveries on their investments under traditional bankruptcy law.  Instead, the Administration heavily favored the United Auto Workers in negotiations, even though the UAW’s investments in Chrsyler were subordinate to those of the bondholders.

Like I posted back in November, I believe the Obama Administration has a two-fold purpose in these moves:  to play favorites with the UAW, a group that heavily supported Barack Obama’s candidacy, and to force Detroit to build fuel effecient cars that meet the Administration’s environmental standards.   After all, Lisa Jackson, the head of the Environmental Protection Agency, said in a recent interview, ““The president has said, and I couldn’t agree more, that what this country needs is one single national roadmap that tells automakers, who are trying to become solvent again, what kind of car it is that they need to be designing and building for the American people.”

My predictions for the next steps in this debacle of government intervention are that some of these moves by the Administration end up in the courts- and the court fights will get nasty.  I also continue to predict that both General Motors and Chrysler will perform terribly while under the management of the government, as too many concessions are given to the UAW and too many restrictions are placed on the types of cars they produce, on the manner in which they advertise, on executive pay, and on other facets of their business.  History will not look kindly on the Administration’s moves in this respect. 

I still firmly believe these companies should be allowed to fail and go through the traditional bankruptcy process.  The government should not take any ownership interest in them. This would, in the end, be fairer to all parties and increase the likelihood that one or both of them could build a viable business model for the future, without oppressive government regulations and restrictions.