by Faiz Shakir, Amanda Terkel, Matt Corley, Benjamin Armbruster, Ali Frick, Ryan Powers, and Ian Millhiser
This week, auto giant General Motors (GM) followed Chrysler and filed for Chapter 11 bankruptcy, making it the fourth largest U.S. company to ever take such a step. As a result of the pre-packaged bankruptcy plan, the U.S. government will own a 60 percent stake in GM, with the United Auto Workers (UAW) receiving 17.5 percent, the Canadian government taking 12.5 percent, and GM's unsecured bondholders taking 10 percent. In order to finance its bankruptcy, "the fallen icon of American industry will rely on $30 billion of additional financial assistance from the Treasury Department and $9.5 billion from Canada," which is in addition to the $20 billion GM had previously received in low interest loans from the Bush administration. As the American Prospect's Harold Meyerson put it, government investment "was simply the one course available to avert an economic holocaust in the Midwest (not just in Michigan but in Ohio, Indiana, and other states as well) that would plunge the nation deeper into recession." Of course, this hasn't stopped conservatives from claiming that the bankruptcy plan puts the U.S. "on the road toward socialism."
Why Bankruptcy Now?
In an interview Tuesday with Fox News's Greta Van Susteren, Vice President Cheney admitted that the Bush administration deliberately decided to pass the buck on GM, giving the company a bridge loan and then leaving the problem for Obama. Other prominent Republicans, like Republican National Committee chairman Michael Steele, responded to Obama's plan by saying that the company should simply "go into the market, they work out their situation in the market." But the Obama administration's packaged bankruptcy makes sense for both GM and the country's economic stability. Without the government financing its bankruptcy, GM "would have ended up in liquidation, shedding 60,000 hourly jobs instead of 20,000" and selling assets at firesale prices. And as the New Republic's Jonathan Cohn wrote, "the pain wouldn't have stopped there. It would have spread to GM's suppliers and, eventually, to all of the communities where these workers spend money." By delaying bankruptcy, the administration was able to announce that it would back GM's warranties, set plans to close dealerships, allow suppliers time to diversify, and work out a deal to ensure that autoworkers received some of the benefits and pensions that they earned. As economist Dean Baker explained, "back in December and January, when none of these pieces were in place, there was still enough up in the air that I think it would have been reckless to have done a bankruptcy."
The Plight of the Bondholders
A favorite conservative reaction to the GM bankruptcy has been to claim that it unfairly benefits unions and violates the rights of GM's bondholders. A group of Republican House members said that "the proposal seems to favor the rights and claims of the UAW, a political ally of the current administration...over the rights and claims of the company's diverse group of bondholders." Some have even gone so far as to claim that the administration's plan is illegal. Rep. Eric Cantor (R-VA) said that "the White House [is] coming in and favoring the UAW, basically making the rights of the bondholders inferior, outside any kind of legal framework whatsoever. There has been a downright suspension of the law." But, as the Washington Post noted, "[T]here are a number of precedents for retiree health funds getting preferential treatment during bankruptcies, particularly in the steel industry in recent years." It's also likely that the GM bondholders would get no more in liquidation than they are getting under the current plan, which may be why a majority of bondholders (54 percent) support the plan. And as for the claims of illegality, Reuters"s Felix Salmon pointed out that an unsecured bondholder "has no 'legal right' to get exactly the same outcome as any other creditor." "[I]f the bondholders have a better idea of what's fair, they're more than welcome to provide tens of billions of dollars in debtor-in-possession financing in order to make that happen. But of course they're not willing to put in so much as a nickel, which means that it's not up to them," Salmon wrote.
A Responsible Exit Strategy
House Minority Leader John Boehner (R-OH) responded to the GM plan by saying "the only thing it makes clear is that the government is firmly in the business of running companies using taxpayer dollars." However, according to the New York Times, "[A] quick restructuring appears possible" precisely because of the agreements brokered by the administration with the union and GM's bondholders. As Obama said, "GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to innovation and quality. They -- and not the government -- will call the shots and make the decisions about how to turn this company around." Reuters noted that the administration has "created safeguards to prevent interference, including prohibiting government officials from sitting on the firm's board or working for firms in which the automaker invests." Steve Rattner, head of the Obama administration's auto task force, said that GM's shares will be sold off in a series of transactions over the next 12 to 18 months in order "to maximize the return" for taxpayers. "Obviously we could exit tomorrow if we wanted to by handing out shares at the corner of Pennsylvania and 17th or selling them for a dollar, but we have a huge amount of taxpayer money here," Rattner said. "But while we want to exit as soon as possible, we also want to exit as soon as practicable in terms of being good custodians of the taxpayers' money."
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