Friday, August 13, 2010

Nate Oman Weighs in on the GM/Chrysler Bailout

In a Washington Times editorial one of my favorite Times and Seasons Bloggers, Nate Oman, weighs in on the GM/Chrysler bailout (h/t Junior Ganyemede). A good short read and can I just give a hearty amen? The only thing he omits that I would have mentioned, although a commenter does make the point, was that when they "payed back" the TARP loan it was just with other TARP money! (Read this for an explanation of the debt shuffle.)


  1. I disagree with parts of the article, and I agree with parts of the article. For example, in my (strong) opinion the GM/Chrysler bailout needed to happen. And it needed to happen with taxpayer money. I was involved with their pre-bankruptcy attempts at restructuring, and I was involved with their bankruptcy case on multiple levels. No one would help them refinance their debt. Only after multiple attempts at whoring themselves out did they turn to the government to finance their bankruptcy.

    It all started several years ago when Cerberus capital bought Chrysler and it failed miserably. After Cerberus' well-managed perfectly executed and failed attempt at running Chrysler, no fund would ever touch an auto giant again. Even if there were a bank healthy enough to fund GM's or Chrysler's reorganization (and there wasn't), no bank would have committed the amount of capital needed to properly restructure GM/Chrysler because history taught them to avoid giant car manufacturers.

    Of course, I am operating on the assumption that the auto industry is a staple of the American economy. If it is indeed no longer a staple, then my idea that the reorganization was necessary falls apart.

    The next point, and where I agree with Nate Oman and Rob is that the GM/Chrysler bailout happened for the wrong reasons. Instead of doing it to save GDP, unemployment, and the parade of triumphs that could have motivated the government to save GM/Chrysler, it seems that the Obama administration bailed them out simply because of their ties to union support. Sigh. I'm sure the government stood to lose significant tax revenues and export taxes as well.

    Normally in a bankruptcy, the unions get royally screwed, but not in the auto cases. The bankruptcy courts really did push the unions up the priority scheme, setting a new precedent that will probably be ignored due to extenuating circumstances surrounding the auto cases. The federal money seemed to be contingent upon the unions getting bailed out.

    The next point where I agree with Rob is that the first auto bailout money (which wasn't exactly TARP money but close enough) was repaid with TARP money. That was ridiculous. And now the Obama Administration is putting a gun to GM's head to get an IPO out before elections in November so that they can repay the government and then the government can tout how they "made money on the deal." And frankly, they actually might turn a profit on the deal when you include the tax revenue they will obtain from GM and their employees.

    I feel like Bush went into the middle east for all the wrong reasons when he could have gone in for all of the right reasons. Its a similar story. Something needed to happen with Saddam, we just did it wrong and in the wrong way with the wrong motives.

  2. sorry i said whoring out. I meant to edit that...

  3. Thanks Gil! It's nice to hear from someone directly involved in these types of things. I don't follow your first paragraph. Did the govt. actually finance a bankruptcy? I thought the govt. forestalled bankruptcy. Is your point that no private financing would have been available to prevent bankruptcy?

    Second question, if GM or Chrysler had been allowed to go through bankruptcy, wouldn't their assets (IP & brands, manufacturing plants, other physical facilities) been sold off to other auto companies (including some foreign ones) that probably could do a much better job managing them? In other words, do we really believe that we would not have a domestic auto industry if these guys went bankrupt. This dude thinks it would still exist just under different management:

  4. In answering your first question: yes, the government financed their bankruptcy directly. It actually takes money to restructure in a bankruptcy (which, is why not very many companies have been able to file bankruptcy lately--inability to finance their reorganizations). The financier of the reorganization actually gets first priority on the payback. This means for practical purposes that usually he who is owed the most will finance the bankruptcy so that they have a higher likelihood of getting paid back. Sometimes the second lien lender will finance the bankruptcy so that they can get paid back even before the first lien lender. GM shopped around trying to get a lender to finance their bankruptcy. They couldn't do it. So the government financed it.

    Second: this guy's theory is great. But in my opinion it's not practical. GM's assets are much more valuable sold as one bundled package instead of bundling smaller groups of assets and selling them to several buyers. And sure, they might do a better job managing the smaller bundles of assets, but the aggregate is still more valuable because the company is (theoretically) intricately woven together.

    Again, my entire theory that the GM bankruptcies were handled correctly rests on certain assumptions, like: (1) the auto industry is critical to America; (2) without GM, our auto industry will not be able to revamp; (3) GM can potentially become solvent on its own post-restructuring.

    If those things are true, then the GM bankruptcies were handled well. If not, then we should have let them get liquidated and go down to Chinatown.