Congress is up in arms over the G.M. and Chrysler restructuring deals, which resulted in the closing of some 2,000 local dealers across the country. These dealers have a great combination of congressional district-sized clout and money to badger their representatives into confronting the administration over the deal, and now there are bills in both the House and the Senate trying to reverse the closings. This is, as I've written before, a terrible idea that would upset a very carefully balanced sharing of pain between different auto industry stakeholders, and an especially hypocritical position for Republicans to take after their many criticisms of the government being involved in business decisions.
This morning, I spoke with Ron Bloom, the head of the Administration's Auto Industry Task Force, for an article that's coming out in the September edition of the Prospect. But as we talked about his recent testimony before the House Judiciary Committee, he made some smart points about the automaker bailout that are worth posting today:
Disingenuous might be a fair word, to have people lecture us on the wonders of the free market, and the terrible situation we have when the government chooses to intervene, then insist that the government intervene on behalf of one particular stakeholder. Look, I understand and sympathize, certainly sympathize with the dealers. ... The fundamental fact that I think people have trouble with is that, for better or for worse, these companies were insolvent. They failed. ...This treatment of dealers, while it was quite unfortunate that these people, some of them, could lose their job -- it's terrible -- there really are fundamentally only two alternatives, and then there's a false one people put forward.
One, you could say the companies should be allowed to liquidate, and while I think that is a terrible decision, at least it has intellectual honesty. The second thing you could say is that the company ought to pay everybody everything it owes them. But if that's true, we might as well say that …there shouldn't be consequences for [having a failed company], and that's a very dangerous place to be. ... the size of the check you've got to write is multiple of the check that we did write, which is big as it was.
The false one that people put forward is, 'Yeah, yeah, yeah, you ought to do all those other guys and take their promises away, but my promise ought to be kept, my promise ought to be sanctified above all others.' And once you start down that slippery slope, then you're paying everybody everything they're owed.
The only screen I think that has intellectual rigor is a commercial screen, which is to say, what would be the treatment that you would get in the commercial marketplace? Companies that have commercial agreements with companies that go bankrupt, those agreements do not survive the bankruptcy unless the company affirmatively wants them to. This would be true for other companies in similar circumstances. That's not a nice thing, but bankruptcy isn't a nice thing. … the president has been remarkably commonsensical about this, in saying that unless there is shared sacrifice the word sacrifice has no meaning.
That's the most important thing to remember about this deal: It really is shared sacrifice. Dealers aren't happy to be closing, the unions were not pleased to trade their pensions for a stake in a company in a very precarious place, bondholders were unhappy to take haircuts on their debt, etc. But the fact that everyone took these cuts means that GM and Chrysler are still open, which is better for everybody -- and the economy -- at the end of the day.
-- Tim Fernholz
