Kudos to the Wall Street Journal for laying out in an easily digested manner the complicit pay-to-play scenario that was the Obama Auto Bailout of 2009 – among the most blatant abuse of taxpayer dollars in recent memory.
Sherk and Zywicki: Obama's United Auto Workers Bailout
If the administration treated the UAW in the manner required by bankruptcy law, it could have saved U.S. taxpayers $26.5 billion.
President Obama touts the bailout of General Motors and Chrysler as
one of the signature successes of his administration. He argues that the
estimated $23 billion the taxpayers lost was worth paying to avoid
massive job losses. However, our research finds that the president could
have both kept the auto makers running and avoided losing money.
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. 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. Section
1113 of the Bankruptcy Code enables reorganizing companies to improve
their post-bankruptcy competitiveness by renegotiating union contracts
to competitive rates. In April, for example, American Airlines proposed
using this power to bring down its labor costs to the level of its
rivals, just as Delta and United had in earlier bankruptcy filings.
The administration decided not to do this at GM. The UAW did accept
sharp pay cuts for new hires. But they only made modest concessions for
their existing members, like eliminating the much-maligned Jobs Bank
that paid workers even when they were laid off.
Read More: The Wall Street Journal
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