Reports that the auto bailouts will cost taxpayers $25 billion more than previously projected have sparked the predictable political squabbles that attend an election year. Liberals claim the cost to taxpayers was worth the price of saving American car companies, while conservatives grouse about what they see as government wasting more taxpayer money.
The reality, however, is uglier than either side realizes. Those behind the wheel of the automobile bailout were not folks who build cars but cronies who successfully leveraged their highly placed connections. Indeed, lift the hood, and what you find is that the auto bailout was a classic tale of cronyism, in which the well-connected sped away with big bucks.
Let’s start with the players involved. General Motors (GM) was by far the biggest recipient of auto bailout funds ($50.2 billion for GM and $17.2 billion for GMAC). When combined with Ally Financial (formerly GMAC), taxpayers are still on the hook for $41.7 billion. Chrysler and Chrysler Financial received a total of $12.4 billion and repaid $9.5 billion, resulting in a net loss of $2.9 billion.
GM continues to hemorrhage market share and controls just 17.7 percent of the auto market, a 90-year low. When GM made a public offering in November 2010, the share price was $33 a share. It’s now trading at around $25 a share. The federal government owns 500 million shares of GM, or about 32 percent of the company. The stock price would need to get to $53 a share to break even. At its current market price, the government is sitting on a $14.5 billion loss.
Despite claims that GM is selling a lot of cars, a lawsuit filed by investors who bought into GM’s initial public offering in June alleges that the books are being cooked. The investors feel hoodwinked because GM was “predicting revenue based on production rather than actual sales.” (What business does that?) The lawsuit references a Bloomberg article that states, “GM may have been unloading excessive inventory on dealers, a practice known as ‘channel stuffing,’ in order to create the false impression that GM was recovering and sales and revenues were rising.” The problem is that although GM is stocking more and more cars in its dealers’ lots, few cars roll out of the showroom. So while GM is being touted as a successful turnaround story, the all-American car company is incentivizing its dealerships to take more product and counting that as sales.
In short, the bailout has merely kicked the GM can down the road and left taxpayers to pick up the tens of billions in bills.
Still, some people made out like bandits on the auto bailout.
In his recent book “Bailout,” the former special inspector general for the Troubled Asset Relief Program, Neil Barofsky, points out that when it came to the bailout of GM, no one with auto-industry background was involved in the decision-making process. “Led by Steven Rattner, the head of a Wall Street private equity firm, and Ron Bloom, a former investment banker and head of collective bargaining for the United Steelworkers Union, the auto team had plenty of Wall Street firepower but did not include in its ranks anyone with experience in the automobile industry.” Likewise, when it debated the question of closing auto dealerships, the task force consulted “a bevy of Wall Street analysts.” Little surprise then that the winners are largely relegated to the world of Big Finance.
The GM bailout was handled by Evercore Partners, an investment firm in New York headed up by former Assistant Treasury Secretary Roger Altman. Before the bankruptcy, GM paid Evercore $46 million in advising fees to help GM find a buyer. Then, when the government came in and bailed out GM, Evercore turned around and asked for an additional $17.9 million “success fee.” Never mind that Evercore never found a purchaser or a funder — the company still called it a “Government Funded Sale Fee” in court documents.
Indeed, Evercore also took over the lucrative position of handling the General Motors Special Hourly-Rate Employees Pension Trust and the General Motors Special Salaried Employees Pension Trust. Those new pension funds were financed courtesy of more than 60 million shares of common stock, diluting the taxpayer stake in the company. The trustee for both of those new pension funds is Evercore Trust Co., a subsidiary of Evercore Partners.
Mr. Altman is also an Obama bundler, bringing in up to $500,000 so far. Evercore Partners CEO Ralph Schlosstein hosted a $38,500 per plate fundraiser at his home, raising a total of $2.1 million for President Obama and the Democratic National Committee.
The other big winners were the lawyers and government bureaucrats who handled the bailout. Mr. Bloom has returned to the investment house of Lazard Freres as vice chairman of U.S. investment banking, where he worked from 1985 to 1990. “I do think that my time in government can help to open that door a little bit,” he told Bloomberg Businessweek. He’s now advising mail carriers as the U.S. Postal Service undergoes restructuring.
When it came to making financial decisions affecting the automotive bailout, insiders and favorites made out well and outsiders were left outside. Nonunion workers saw their pensions go bust. The financiers on the Auto Task Force in Washington shafted 22,000 salaried retirees out of their pensions. Why? Those salaried retirees of the former Delphi Corp. (a longtime GM parts supplier) had a fairly solid pension fund, which was 85 percent funded. What they didn’t have was the political clout of the United Auto Workers. The Treasury Department urged the Pension Benefit Guaranty Corp. to seize the Delphi pension plan. This was not a financial decision — it was a political decision.
The same calculus lies behind other decisions as well, like cutting costs. As Steve Rattner, head of the Auto Task Force, explained in his book “Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry,” General Motors wanted to move out of its Renaissance Center headquarters and relocate to GM’s Tech Center in suburban Warren, Mich. “The move would cut costs,” he said, “as well as symbolize the leadership’s determination to become more down-to-earth and hands-on. I thought the idea was great, just the kind of action I was hoping to see from [GM Chief Operations Officer Fritz Henderson].” But this common-sense idea was killed by the White House aides (including then-Chief of Staff Rahm Emanuel) Mr. Rattner says, because it would be bad politics and hurt the Detroit real estate market.
Despite all this, the politicians continue to squabble over the wisdom or folly of bailing out the big car companies.
Call it what it was: a boon to well-connected cronies who knew nothing about the automobile industry or its workers but were more than happy to send the invoice to taxpayers for shoddy repairs.
Peter Schweizer is the William J. Casey Fellow at the Hoover Institution at Stanford University, president of the Government Accountability Institute and author of “Throw Them All Out” (Houghton Mifflin, 2011).