production at Ford and the American-based foreign car plants. Imports would
replace 70 percent of the lost GM and Chrysler production, the group
When Obama took office, he created a task force with a sweeping mandate to determine the fate of GM and Chrysler. The companies' first proposals to the task force included downsizing, but the task force wanted deeper changes. In March 2009, Obama rejected those plans and said if the firms wanted federal money, they had to go through bankruptcy. That happened quickly. The car companies filed for bankruptcy in June and emerged in July.
Between 2008 and 2010, carmakers closed or scheduled the closure of 16 plants and cut their ties with about 2,500 dealerships. Stockholders were wiped out and creditors such as banks and pension funds wrote off about two-thirds of the value of their claims. The companies shed their entire obligation to pay for the health care of retired autoworkers and that burden shifted to an independent trust fund in which the United Auto Workers union appoints five out of 11 board members.
Under new Ownership
What emerged was a smaller American auto industry with a very different set of owners.
The Italian car company Fiat became the majority stockholder of Chrysler. The second-largest owner of Chrysler now is that retiree trust fund. For GM, the U.S. government now owns about 32 percent of the company. Private shareholders account for about 35 percent. The retiree trust fund owns about 10 percent.
The union gave up the right to strike through 2015 and ended automatic pay raises. Back in 2007, it had agreed to a two-tiered wage scale that allowed the companies to hire new workers at much lower pay. Between the new wage rates and the savings from taking over retiree health costs, labor costs fell by about a third and are now on par with those of the foreign carmakers.
The entire deal was financed with about $80 billion in taxpayer money. That included a special $5 billion set aside to keep cash flowing to car parts suppliers when they found that their normal lines of credit had vanished.
Today, total employment for carmakers and parts suppliers is up about 250,000 from 2009. In 2011, sales rose 10 percent for GM, 13 percent for Ford and 14 percent for Chrysler.
"Both Chrysler and General Motors are not just profitable," said Aaron Bragman, senior analyst with IHS Automotive, a financial forecasting group. "They are significantly profitable, earning more now than they have in years."
The benefits have not flowed simply to GM and Chrysler. In a speech this June, Ford CEO Alan Mulally said the bailouts were the right medicine for his company as well.
"If GM and Chrysler would've gone into free fall," Mulally said, "they could've taken the entire supply base into free fall also, and taken the U.S. from a recession into a depression."
Still, the current success leaves critics asking whether it came at too high a price. The Treasury Department estimates that about $23 billion will never be repaid. For James Sherk, an analyst at the conservative Heritage Foundation, much of that is due to "incredibly generous treatment of the unions." Sherk says the union's retiree health benefit fund got about $21 billion more than it deserved compared with other creditors.
Mitt Romney has taken up that claim, saying the bailout was flawed by "crony capitalism." The union counters that the trust fund does not belong to the union and that the fund took on the substantial risk of providing health care for retirees for all the decades to come. According to the Center for Automotive Research, that shift alone accounted for two-thirds of the labor savings that have made the carmakers competitive.
At the libertarian Cato Institute, Dan Ikenson says no one can know for sure, but he thinks disaster would not have occurred if the companies had been allowed to go through a normal bankruptcy.
"I suspect some assets of both companies would have been sold off to other auto producers," Ikenson said. "And some assets and brands would have remained under the GM and Chrysler names."
A key question for advocates of a conventional bankruptcy is whether private lenders would have come forward to finance any such deal. The view of most analysts is that the private money would not have been there.
Even Sherk at the Heritage Foundation gives Obama credit for forcing the carmakers to go through bankruptcy and the necessary restructuring after.
As we said at the start, it is impossible to know if the U.S. auto industry would have fared better without government money, without government ownership, without strong government intervention. Most likely, that debate would be more robust if the industry were not doing well.
But for the moment, it is. The massive loss of jobs and the disruption to the network of auto parts suppliers did not happen. The shock that might have hit all carmakers and the overall economy is not staring lawmakers in the face. Given the tangible reality of today, the view among most analysts is that Bush kept the carmakers afloat long enough for Obama to put them on solid footing moving forward.
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