U.S. Intervention in Auto Markets: Numbers and Politics

The U.S. Government’s intervention in the domestic auto market, via their direct assistance to American automakers General Motors and Chrysler in 2009, is receiving some real attention now that we have some results to look at. That attention, with the Republican primary in Michigan coming up, has Mitt Romney struggling to give a coherent answer on what his position was at the time of the assistance. But more on the politics later. Lets take a look at some statistics that show how far the automakers have come, and the impacts on the U.S. economy and jobs.

The U.S. Government, under President Bush, first committed TARP funds to both G.M. and Chrylser in 2008. The Bush Administration, aware that the situation was critical for both automakers, declined to allow the U.S. auto industry to disappear, committing TARP funds worth $17.4 billion to both, with GM taking $13.4 billion. (See the Bush Administration “fact sheet” here) The Bush Administration estimated that a failure to intervene by the Government would result in a net loss of 1.1 million jobs, and decrease GDP by 1%. (See oversight report written by Elizabeth Warren in September 2009 here.)

Elizabeth Warren’s oversight report gives some of the history leading up to the crisis, but it is easy to forget some of the facts involved in light of the time that has passed. In addition to a sharp drop in sales the companies had clearly been mismanaged, with bad labor agreements, unsustainable legacy costs, over-capacity, poor quality, poor choices in the development of new lines, and a host of other issues. President Bush, and then President Obama, both determined that the companies needed to restructure, but that an infusion of federal money was necessary if the companies, and the jobs, were going to survive. There was a tough debate on the auto bailout, with critics, such as Mitt Romney, calling for the government to let the companies go through a standard bankruptcy without the infusion of federal money.

Now that the time has gone by we can look at some of the results and determine whether Romney and the critics were right. What did Romney say in that op-ed piece?

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

No money, just a “turnaround”. But the oversight report by Elizabeth Warren points to the obvious, which is that credit markets had dried up, exacerbating the woes of G.M. and Chrysler. As with other sectors of the economy liquidity was a problem, even for firms that had no financial issues. So the idea that a standard bankruptcy procedure for these companies would have maintained them as going concerns is dubious. From the April 2010 report from President Obama, entitled “A Look Back at G.M., Chrysler, and the American Auto Industry”,

By the end of 2008, both GM and Chrysler were on the brink of disorderly liquidations.
As the Congressional Oversight Panel explained in a recent report: “[u]nless they could raise billions of dollars in new financing, they faced collapse – a potentially crippling blow to the American economy that Treasury [at that time] estimated would eliminate nearly 1.1 million jobs.”Other estimates at the time suggested that the near-term jobs at risk from a disorderly liquidation could be even higher.

Romney’s criticism then, and his continuing criticism today, leaves the implication that the federal government simply took cash and threw it at the companies, as is, and said good luck. His contention is patently false, and he well knows it. The task force convened by President Obama rejected the first plans submitted by G.M. and Chrysler for their companies, forcing them to restructure more comprehensively. From the Elizabeth Warren oversight report:

The auto team found GM‟s plan “not viable as it‟s currently structured,” chiefly because it relied on overly optimistic assumptions about the company and the economy‟s recovery. The auto team focused on:
GM‟s consistently decreasing market share over the past 30 years, which the auto team
calculated at a 0.7 percent annual decrease – much greater than GM‟s assumption of 0.3
percent annual decrease going forward to 2014;
consumer perception of GM‟s poor product quality compared to competitors;
GM‟s large network of underperforming dealers;
GM‟s costly and unprofitable European operations;
GM‟s vulnerability to higher energy costs due to its disproportionate profit share from
SUVs; and
increasing legacy liabilities that would require GM to sell almost a million more cars in
both 2013 and 2014.
In short, GM had too much catching-up to do, even without accounting for the sunk costs of restructuring, to generate positive cash flow over the projection period. GM was therefore
asked to submit a “substantially more aggressive plan” and was provided an additional 60 days of working capital.

The nonsensical notion that GM and Chrysler were simply handed federal money and told to carry on is rebutted by a careful examination of the facts. As far as the ramifications for our country and for Michigan and the industrial Midwest of a “disorganized bankruptcy” the facts are also fairly apparent. In November of 2010 the Center for Automotive Research did a report called, “The Impact on the U.S. Economy of the Successful Automaker Bankruptcies”, which outlined some of the impacts to the economy, including foregone transfer payments, that the successful intervention has brought. From that study:

The difference between the two scenarios presented in CAR’s May 2009 memo represented the anticipated private and public benefits of avoiding the scenario of a bankruptcy liquidation of both General Motors and Chrysler. The “good bankruptcy” outcome was projected to have avoided a loss of 1.28 million jobs in 2009, and 267,300 in 2010. Personal income losses were expected to be $65.3 billion less in 2009, and $16.5 billion less in 2010. It was estimated that avoiding the worst case scenario provided a net government impact—in terms of changes in transfer payments, social security receipts and personal income tax receipts—of $25.8 billion in 2009 and $6.5 billion in 2010, a total of $32.3 billion.

As we examine the intervention and begin looking to see whether every federal dollar that was invested has been recouped these numbers are very important. The estimate over two years of a positive impact to government revenues of over $32 billion from the intervention certainly doesn’t seem to be talked about much by critics, but it is real, and reflective of people working, earning, and paying taxes instead of seeking unemployment, and other assistance. The Chrysler intervention has been fully paid back, with the exception of about $1.3 billion. GM has an outstanding balance of about $27.2 billion, but the US Government holds about 500 million shares, which if sold at current prices would result in a $12 billion dollar loss. If the stock price appreciates the government could recoup that investment fully. Mitt Romney has advocated a sale of this stock now, presumably willing to accept that loss. Even if the government were to lose that money fully the CAR Report shows that the positives of over $30 billion absolutely outweigh, on a dollar basis, any potential loss. But measuring the intervention on a straight dollar basis was, and is, a fools errand. The government needed to protect American manufacturing and American jobs, and the intervention has done both. The jobs success obviously extends well beyond the two auto companies, as the government intervention protected and preserved the auto supply chain, the loss of which would have had negative impacts throughout the United States, and in the short term would have had a very bad impact on Ford, as well as foreign manufacturers with US plants.

What else has Mitt Romney said about the intervention? In a Detroit News op-ed Romney accused the Obama Administration of crony capitalism. He relied on the ownership stake taken by the UAW in Chrysler and GM as evidence of this charge. Does the Romney charge have merit? Did President Obama reward union cronies as part of this process? Was the union ownership of 55% of Chrysler such a “reward”? Let us go to footnote 49 of the Elizabeth Warren oversight report:

By the end of the last century, Ford, Chrysler and GM found themselves faced with tens of billions of dollars in employee health obligations. In 2007 and 2008, after it became clear to both the companies and their unions that the state of the American automotive industry made these healthcare obligations unsustainable, the UAW and each of the three companies ultimately entered into an agreement whereby, in exchange for significant upfront payments principally in the form of cash and notes, healthcare obligations for retired union employees would be transferred off the books of the companies and into a trust (an independent entity totally separate from either the union or the automotive companies), the UAW Retiree Medical Benefits Trust, also known as a Voluntary Employees‟ Beneficiary Association (VEBA). VEBAs are tax free entities that pay health, life, or similar benefits.
Although subject to the fiduciary requirements of the Employee Retirement Income Security Act of 1974 (ERISA), they are not subject to ERISA funding rules as are qualified retirement plans – a company‟s funding obligation is solely contractual. The threat of a Chapter 11 bankruptcy filing by Chrysler and GM made it clear that these companies would not be able to meet the cash commitments they had made to the UAW Trust. As part of a new agreement reached with representatives from both the old and new Chrysler and GM entities to enable them to emerge from bankruptcy, the UAW agreed to significant changes to the funding structure of the UAW Trust. While the UAW was able to get these companies to transfer cash amounts already set aside by the old Chrysler and GM entities (about $10 billion from GM and about $1.5 billion from Chrysler), the balance of the commitments these
companies had made will no longer be paid up front in cash. Instead, New GM and New Chrysler have agreed to contribute large portions of equity, as well as notes that will allow cash commitments to be deferred and paid over time, into the UAW Trust. In order to help it remain competitive and avert bankruptcy, Ford negotiated similar alterations to its settlement with the UAW. Starting January 1, 2010, UAW retirees‟ healthcare benefits will be funded solely by the assets in the UAW Trust, and will receive no further commitments from Old Chrysler, Old GM or Ford. New GM and New Chrysler – as with Ford – will no longer have the healthcare obligations that have been weighing down their predecessor companies‟ books for decades, while the healthcare benefits of the UAW‟s retired members will still be linked to the fortunes of all three companies through the tens of billions in stock and notes.

So all of the domestic auto companies, including Ford, managed, through negotiation, to shift huge retiree health care costs to the UAW. In return for this the three companies agreed to make cash contributions to these “VEBAs”. Since cash, for the Big Three was hard to come by, they contributed both cash and equity. As you can see from the above Ford, who did not participate in the so called “bailout”, also entered into a similar agreement. Again Romney knows that his charge is patently false, and yet he continues to make it. The question for Governor Romney is this: what would you have done with the retiree health care that might have been impacted without this intervention? The exact terms for Chrysler? From Elizabeth Warren’s report.

As part of New Chrysler‟s purchase of Old Chrysler‟s assets, New Chrysler entered into
an agreement with the United Auto Workers (UAW) regarding the funding of the UAW Retiree
Medical Benefit Trust (the UAW Trust).New Chrysler agreed to fund the UAW Trust with a $4.6 billion unsecured note and a 55 percent ownership stake in New Chrysler. The UAW Trust, subject to approval of the UAW, has the right to select one independent director and no other governance rights.

No other governance rights! The accusation by Mitt Romney, and the willingness to play so fast and loose with the truth, ought to be vigorously challenged by President Obama and those who supported the intervention.

General Motors has just regained the designation as the number one auto maker in the world, which they had lost to Toyota. GM regained the designation in 2011, selling 9.025 million units. Lets look at the GM stats for worldwide sales.

2008- 8,282,803

2009- 6,459,053 (-22%)

2010- 8,476,192 (+31%)

2011- 9,025,000 (+6.4%)

Chrysler has shown similar progress. Worldwide sales:

2008- 1,893,068

2009- 959,070 (-49.3%)

2010- 1,578,488 (+64.5%)

2011- 1,850,000 (+17.2%)

Both Chrysler and GM, as well as Ford, have shown strong profits in 2011, and costs per unit produced have been reduced, meaning the break even point for both Chrysler and GM has been substantially improved. In 2010 GM earned $4.7 billion after losing $21 billion a year earlier, and posted record profits for 2011. And labor has agreed to pay reductions, especially for new workers. Pension adjustments, and other modifications to worker packages, have helped the Big Three to come back and actually begin to increase domestic employment in this sector.

A lot of video, with car czar Steve Rattner on Morning Joe, and GM CEO Dan Akerson talking about the US auto industry, and the successful industrial policy employed by the Obama Administration to save millions of jobs, and to save the crown jewel of America’s domestic manufacturing sector.



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