Bailouts no longer money in the bank

The Washington Times Weekly - - National - BY PA­TRICE HILL

The Trea­sury Depart­ment’s bank bailout fund is start­ing to look more like an au­tomaker bailout fund as the United States gets deeper into the car busi­ness and banks work fu­ri­ously to cut their ties to the gov­ern­ment and re­turn their bailout money.

Grow­ing num­bers of law­mak­ers and auto com­pany in­vestors are start­ing to com­plain about the ar­range­ment, as­sert­ing that the gov­ern­ment lacks the au­thor­ity — and the ex­per­tise — to di­vert funds meant for fi­nan­cial in­sti­tu­tions to ma­jor man­u­fac­tur­ers.

The Ge­orge W. Bush ad­min­is­tra­tion made an eleventh-hour de­ci­sion in De­cem­ber to dip into the bailout fund to lend $17.4 bil­lion to Gen­eral Motors Corp. and Chrysler LLC to get them through an­other few months, leav­ing it to Pres­i­dent Obama to find a longterm so­lu­tion to their prob­lems.

Many law­mak­ers went along with that move out of ex­pe­di­ence, but Congress never voted on di­vert­ing the bank res­cue funds into a ma­jor bailout of the auto sec­tor that has bur­geoned to $80 bil­lion in size, pushed both com­pa­nies into bank­ruptcy and na­tion­al­ized Detroit’s largest man­u­fac­turer, GM.

“It is now clear that the fed­eral gov­ern­ment’s bailout of the auto in­dus­try sev­eral months back was a mis­take,” said House Mi­nor­ity Whip Eric Can­tor, Vir­ginia Repub­li­can, not­ing that the full cost of the bailout for tax­pay­ers is still far from clear.

In­vestors who are fight­ing the Chrysler re­or­ga­ni­za­tion plan and have ap­pealed to the U.S. Supreme Court are chal­leng­ing the le­gal­ity of us­ing the bailout funds to spon­sor Chrysler’s bank­ruptcy, say­ing it vi­o­lates the law es­tab­lish­ing the bailout fund for banks last fall. But that is only one area where the gov­ern­ment stepped over the line and ex­ceeded its au­thor­ity, they say.

“This bat­tle is of epic pro­por­tions,” said Tom Lau­ria, an at­tor­ney for Chrysler lenders, ar­gu­ing that the White House auto task force has not hes­i­tated to ab­ro­gate the law and con­trac­tual rights of lenders to push through its bank­ruptcy plans for Chrysler and GM.

“For the United States gov­ern­ment to step in, the ex­ec­u­tive of­fice of the United States gov­ern­ment, who un­der the Con­sti­tu­tion is charged with en­forc­ing the laws to step in and try to in ef­fect break the laws, I think we should all be con­cerned about that,” he said. “That is a con­sti­tu­tional is­sue.”

The Supreme Court may agree to hear their ar­gu­ments af­ter tem­po­rar­ily de­lay­ing the sale of Chrysler’s best as­sets to a Fiat-led con­sor­tium on June 8.

While a few are ques­tion­ing the le­gal­ity of the au­tomaker bailout, many an­a­lysts are ques­tion­ing the wis­dom of the gov­ern­ment’s move to take con­trol of two-thirds of the U.S. auto in­dus­try and try to re­make it into a “green” man­u­fac­tur­ing cen­ter.

Chrysler and GM have made their marks — and most of their money — by mak­ing large cars and trucks that were pop­u­lar with Amer­i­cans even if they were heavy on emis­sions.

“There is al­ready enor­mous pres­sure on GM to aban­don the ve­hi­cles that make it money — gas-guz­zling SUVs and pick­ups — in or­der to fo­cus on fuel-ef­fi­cient cars that lose money,” said Jim Manzi, a se­nior fel­low at the Man­hat­tan In­sti­tute, a free-mar­ket think tank.

“This is a ter­ri­ble harbinger for the U.S. econ­omy,” he said, es­pe­cially when com­bined with the pres­sure tac­tics the ad­min­is­tra­tion used to force Chrysler’s big­gest bank lenders — all re­cip­i­ents of bailout aid — to con­cede their le­gal rights to re­pay­ment on Chrysler loans so that the ad­min­is­tra­tion could forge a re­struc­tur­ing deal heav­ily fa­vor­ing Chrysler’s union­ized em­ploy­ees.

“We ap­pear to be headed for Euro­pean-style in­dus­trial pol­icy circa 1975, with a com­pli­cated set of fa­vors be­ing traded be­tween elected of­fi­cials, gov­ern­ment bu­reau­crats and cor­po­rate bu­reau­crats,” he said.

In ex­change for the gov­ern­ment largesse, for ex­am­ple, GM wasn’t al­lowed to send pro­duc­tion of a new line of small cars to China, where la­bor costs are much lower.

To com­pen­sate the car com­pa­nies for end­ing pro­duc­tion of their most prof­itable lines, the gov­ern­ment will give more sub­si­dies for clean-en­ergy re­search, he said.

The po­lit­i­cal in­ter­fer­ence will pre­vent the re­or­ga­nized au­tomak­ers from suc­ceed­ing, de­spite the fresh start af­forded by their dip into bank­ruptcy, said Peter Schiff, pres­i­dent of Euro Pa­cific Cap­i­tal.

“With Wash­ing­ton call­ing all the shots, the po­ten­tial for longterm vi­a­bil­ity has been dashed,” he said. “Giv­ing con­trol of Chrysler and GM to the [United Auto Work­ers] and the gov­ern­ment en­shrines a cul­ture of fail­ure and seals Detroit’s fate.”

Mr. Schiff pre­dicted that “both com­pa­nies will be­come gov­ern­ment-spon­sored en­ti­ties, not too dis­sim­i­lar from Am­trak or the post of­fice, for­ever re­ly­ing on tax­payer funds to cre­ate prod­ucts of du­bi­ous qual­ity.”

In Congress, only a few Repub­li­cans have raised stren­u­ous ob­jec­tions to the ad­min­is­tra­tion’s auto bailouts, in­clud­ing the di­ver­sion of money from the bank bailout fund. Some have sug­gested that the money be­ing re­turned by big banks such as JP- Mor­gan Chase & Co. and Gold­man Sachs Group Inc. should be used to re­duce the na­tional debt rather than pay for more bailouts.

Demo­cratic leaders have mostly gone along with the White House game plan, though a few have com­plained that it doesn’t go far enough in pro­tect­ing im­por­tant po­lit­i­cal con­stituen­cies. Sen. John D. Rock­e­feller IV, West Vir­ginia Demo­crat, said in a hear­ing last week that the Chrysler deal did not give dealers enough time to wind down their busi­nesses.

Such de­mands from Congress are likely to in­crease the cost of the auto bailout. A line al­ready is form­ing at the Trea­sury as hard­hit auto sup­pli­ers, dealers and fi­nanc­ing com­pa­nies plead their cases of hard­ship in the wake of the bank­rupt­cies. Many have found a sym­pa­thetic ear.

Mean­while, the Trea­sury has sud­denly found it­self with the where­withal to fi­nance the grow­ing auto bailout, thanks to the shrink­ing size of its bank bailout ef­forts. Big banks that re­ceived bailout funds last year have been lay­ing plans to re­turn as much as $40 bil­lion to $50 bil­lion to the Trea­sury, mo­ti­vated by the de­sire to get out of gov­ern­ment re­stric­tions on ex­ec­u­tive pay and div­i­dends.

The Trea­sury and Fed­eral De­posit In­sur­ance Corp. two weeks ago qui­etly post­poned their much­her­alded pro­gram for sell­ing toxic bank as­sets, which was ex­pected to cost $75 bil­lion, for lack of in-

“We ap­pear to be headed for Euro­pean-style in­dus­trial pol­icy circa 1975, with a com­pli­cated set of fa­vors be­ing traded be­tween elected of­fi­cials, gov­ern­ment bu­reau­crats and cor­po­rate bu­reau­crats,” said Jim Manzi, a se­nior fel­low at the Man­hat­tan In­sti­tute, a free-mar­ket think tank.

ter­est on Wall Street. An $85 bil­lion plan to re­vive lend­ing for small busi­nesses and con­sumers has been slow to get off the ground and has re­quired lit­tle con­tri­bu­tion from the Trea­sury.

Last month, af­ter much pub­lic­ity and con­ster­na­tion over how much more bailout funds banks would need af­ter sub­mit­ting to the Trea­sury’s stress tests, the only in­sti­tu­tion that ended up re­ceiv­ing more as­sis­tance from the fund was GM’s for­mer lend­ing arm, GMAC.

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