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Latest News - August 2012

August 8, 2012
The True Costs Of The UAW Bailout
Source: Investor's Business Daily

The administration claims to have saved the U.S. auto industry. What it really saved was the industry's dominant union — and it weakened capitalism in the process.

Michigan is one of those light-blue states where Mitt Romney just may have a chance on Nov. 6. Don't be surprised, then, if Barack Obama's re-election campaign carpet-bombs it with ads noting that Romney once said the auto industry should go bankrupt, and that the Obama administration found a better way.

In fact, two of the Big Three automakers did go into bankruptcy under Obama. But it was a bankruptcy like no other before and, we hope, no other to come.

Washington not only used taxpayer money to buy control of General Motors and Chrysler, but it also rewrote the rules on the treatment of creditors.

Superficially at least, the intervention worked, but it hasn't been cheap. GM is back to making a profit, though it is struggling in Europe and once again has lost its No. 1 market share to Toyota. And the perennial problem child Chrysler is now in Fiat's lap.

The administration sold its interest in Chrysler in July 2011, racking up a loss of $1.3 billion. It still holds 26% of GM and is riding the stock price down. With GM shares trading at just over $20, the taxpayer's paper losses are at least $16 billion.

Those are just the obvious costs.

The government's tweaking of bankruptcy and tax rules freed GM from the usual limits on carrying pre-bankruptcy losses forward. Curt Levey, executive director of the conservative legal group Committee for Justice, estimates that this special tax break adds $18 billion to the cost of the GM deal.

Also, the bailouts would have cost much less if not for the favored treatment given to the United Auto Workers. According to analysis by the Heritage Foundation's James Sherk and George Mason University law professor Todd Zywicky, the UAW giveaways were worth about $26 billion.

Most of this sum came in payouts — stock and notes — to settle debts owed by GM and Chrysler to a union's Voluntary Employee Beneficiary Association, an entity set up to cover retiree health care costs. VEBA fared much better than other unsecured creditors and even those (at Chrysler) with asset-backed debt.

The administration also added to taxpayers' costs by refusing to push for significant changes in compensation to current UAW employees.

 

 


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