What the Chrysler saga should have looked like — Part 1 — VOICES for REASON

My colleague Tom Bowden just wrote a very helpful blog explaining the details and injustices of Chrysler’s phony bankruptcy. I want to look at Chrysler from a slightly different aspect: How should the Chrysler case have been handled by the government since last December — when the Bush administration propped it up with billions in bailout money? Answering this can help us advocate for the right policies today and understand just how wrong the government’s actions are.

When Chrysler was heading for bankruptcy, both late last year and late last month, if its leaders thought the company was potentially viable they should have made an attractive proposal to investors–a proposal that investors thought would make the company profitable and therefore give them a return on their investment. And if it couldn’t acquire funds on the free market, then it would declare bankruptcy once its liabilities exceeded its assets and it could no longer pay off its debt. In bankruptcy court, its various creditors would seek to make the best of a bad situation by redeploying or liquidating the company’s assets, depending on what would get them the most of their money back.

This free-market process is what should have occurred both times Chrysler ran out of cash. Instead, we have witnessed a travesty.

Any real, free-market attempt by Chrysler to avoid bankruptcy would have meant, above all a drastic renegotiation of the company’s biggest obstacle to solvency: its contracts with its United Autoworkers Union (UAW) employees. Historically, the UAW, used the Wagner Act to extort above-market wages and benefits from all the members of the Big Three, such that their per-car labor costs exceed Toyota and Honda’s by several thousand dollars.

Of course, the UAW would not like wage and benefit cuts, but under a real market, they would have to choose between that and bankruptcy — including the possible end of Chrysler and the need to seek employment elsewhere. Chrysler would have to say, in effect: Earth to UAW. We are failing. Our employees right now produce less value than they cost to employ. That’s what it means to be unprofitable. In fact, the employees under the current structure produce so much less value than they consume, that the company in its current form cannot continue to exist. That’s what it means to be going bankrupt.

But Chrysler did not do that, because in Bailout Nation, the law does not rule; the administration does; it holds the guns and the dollars to manipulate Chrysler in whatever way it declares to be in the “public interest.” And the Obama administration’s notion of the “public good” is for Chrysler and others to a) produce more high-priced, unsafe “green” cars consumers don’t want and b) keep autoworkers employed at their current, inflated wages.

Thus, Chrysler did not make a restructuring proposal to be financially viable, one that would make its creditors whole and reward investors. Instead, with the administration simultaneously pulling the strings and opening the purse-strings, Chrysler proposed that the UAW benefits fund, contractually one of the last in line on the creditors list, would own 55% of the company, Fiat would own 35% for contributing “green technology” and no cash, while creditors “forgave” $5 billion out of $7 billion owed to them — that is, the UAW would profit while the creditors got hosed.

The UAW, of course, loudly shed tears over “concessions” of its own. But, as I will discuss in part two, these “concessions” are so pitiful that they only reveal just how corrupted-in-their-favor the process is. Stay tuned.