September 6, 2012

Latest PJM Column (‘Cronyism’s Costs’) Is Up (Related: Adding Up All the Costs of the GM Bailout)

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 7:45 am

It’s here.

It will go up here at BizzyBlog on Saturday (link won’t work until then) after the blackout expires.


Left on the cutting room floor: The column conservatively estimates that the cost of the Government/General Motors bailout at $70 billion ($1 million for each of the roughly 70,000 jobs “saved”), consisting of the current roughly $25 billion loss the government would have to take on GM stock, the tax benefits of carrying tens of billions in loss carryforwards  from “old GM” into “new GM” (non-crony-favored companies can’t do this), and other items not specified, but which would include the “separate” (cough, cough) Ally Bank/GMAC bailout, the $7,500 per vehicle Chevy Volt tax subsidy, any increases in the purchase of GM vehicles by the federal and other governments, and much more.

Space prevented me from also noting another $26 billion in costs unfairly and illegally dumped on certain of GM creditors which taxpayers would otherwise had to absorb, as laid out by James Sherk and Todd Zywicki at the Wall Street Journal in June:

The preferential treatment given to the United Auto Workers accounts for the American taxpayers’ entire losses from the bailout. Had the UAW received normal treatment in standard bankruptcy proceedings, the Treasury would have recouped its entire investment. (That still leaves the other costs identified above. — Ed.) Three irregularities in the bankruptcy case resulted in a windfall to the UAW.

First, GM and Chrysler owed billions of dollars to the union’s Voluntary Employee Beneficiary Association (VEBA) when they went bankrupt. The union and the auto makers created VEBA in 2007 to assume responsibility for the UAW’s generous retiree health benefits. The benefits allowed UAW members to retire in their mid-50s with minimal out-of-pocket health-care expenses for the rest of their lives. GM owed $20.6 billion and Chrysler owed $8 billion to VEBA as unsecured claims.

A bedrock principle of bankruptcy law is that creditors with similar claims priority receive equal treatment. If you owe $1,000 each on two credit cards, in bankruptcy you cannot choose to pay $900 to Citi and only $200 to Chase. Each of the creditors is entitled to an equal percentage recovery.

In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.

At the time of bankruptcy, GM owed these unsecured creditors $29.9 billion, for which they received 10% of the stock of “new” GM, which went public in November 2010, and warrants to purchase 15% more at preferred prices. Yet VEBA got 17.5% of new GM and $9 billion in preferred stock and debt obligations. Based on GM’s current stock price, VEBA collected assets worth $17.8 billion—$12.2 billion more than if the administration had treated it like the other unsecured creditors.

The same thing happened at Chrysler, only to a greater degree. Chrysler’s junior creditors recovered none of their $7 billion in claims. In normal bankruptcy proceedings, the UAW would have also collected nothing. Instead it walked away owning almost half of new Chrysler and a $4.6 billion promissory note earning 9% interest. Had the stock and note gone to the Treasury instead, the bailout would have cost taxpayers $9.2 billion less.

… The administration also insulated the UAW from most of the sacrifices that unions usually make in bankruptcy—at taxpayer expense.

Had bankruptcy brought GM compensation in line with its competitors’ (approximately $47 an hour), we estimate the resulting savings would have increased the value of the taxpayers’ stake in GM by $4.1 billion. This would still leave UAW members making 40% more than the average American manufacturing worker.

Finally, GM’s decision to assume certain pension obligations of Delphi, the bankrupt former GM subsidiary, also increased the cost of the bailout. New GM no longer had an obligation to support Delphi’s pensions. Yet it decided to spend $1 billion to top up the pensions of Delphi’s UAW retirees. Delphi’s nonunion retirees and retirees in other unions did not fare so well. GM gave them nothing.

Why GM gave $1 billion of bailout funds to employees of a different company it owed no legal duty to remains a mystery. (*)

We estimate that these three irregularities increased the cost of the bailout by $26.5 billion. The Treasury expects the auto bailout to ultimately cost taxpayers $23 billion. The funds diverted to the UAW account for the taxpayers’ entire net loss.

(*) – Well, it’s not a “mystery” if you understand that what the Obama administration is touting as its signature achievement was all about taking care of its cronies — even if it meant anyone else in its path in the process.

GM’s share of the $26.5 billion estimated by Sherk and Zywicki is at least another $14 billion, which comes out to an additional $200,000 per job “saved,” bring the total expended to “save” each of the 70,000 jobs involved to $1.2 million.

And we’re supposed to accept that this was “worth it”? Horse manure.



  1. Were it not for the secured credit that financed GM in their desperate hour they would have collapsed earlier than 2009. This time GM will go bankrupt more quickly and for good given no one will be willing to risk funds via secured debt since the Court ripped up 200+ years of bankruptcy law to save GM and Chrysler. Good riddance.

    Comment by dscott — September 7, 2012 @ 4:13 pm

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