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Government, UAW Take Over the Auto Industry

Government, UAW Take Over the Auto Industry

By Dennis Byrne - April 29, 2009

As the future of the domestic auto industry becomes clearer Tuesday, it appears that an unprecedented government and organized labor partnership would end up running the companies, and if that doesn't give you pause, nothing will.

Under proposed and tentative agreements, the government (meaning us taxpayers) would own half of General Motors and an undetermined slice of a 10 percent stake in Chrysler. In addition, the United Auto Workers Union would own 55 percent of Chrysler and 39 percent of GM.

There's some poetic justice in the possibility that organized labor, which had so much to do with the failure of the domestic auto industry, could end up holding so much of the bag for the mess it helped create.

But how is it that we taxpayers now would have a share of two worthless companies that months ago should have gone into bankruptcy? The not-so-funny irony is that the companies are in no better shape now than when the government months ago insisted bailouts were necessary to spare the country the economic shock of an auto industry "failure." Under the GM reorganization plan, another third of the work force is cut, almost half of its dealerships shuttered and its Pontiac and Saturn lines eliminated. How, pray tell, is that different from what the Obama administration warned would happen if we had let the company go into Chapter 11 reorganization?

Meanwhile, Ford Motor Company, which eschewed a bailout, keeps chugging along with its future in far less doubt that its domestic competitors.

The government/organized labor partnership is not without some serious problems, centering on questions of whose interests will the new owners serve. As an involuntary shareholder through my tax infusions into the companies, I want my equity interests represented. But what's the chance of that happening, when, for example, the UAW owners sit down to negotiate new contracts with its UAW workers. This is a touchy enough issue in an employee-owned (ESOP) arrangement, but when government pulls in unwilling shareholders (i.e. taxpayers) into the arrangement, it becomes even trickier.

Also, how will government as regulator of the auto industry deal with government as owner of the auto industry? For example, the auto industry long has resisted tougher mileage standards, citing safety, consumer preference and technical reasons. So, will the UAW go along with higher standards that would-some say-cut into their sales, with negative consequences for their wages and benefits? Will government devalue taxpayers' equity investment by demanding "unrealistically" high mileage standards? How about safety standards? What about requirements for inefficient battery-driven cars and other green schemes?

I dare say that the Obama administration will see this as another opportunity for vast "change," by creating another costly government bureaucracy: The Department of Automobile Manufacture, whose purpose will be the "public good." Which, of course, will mean greater infusions of ever-greater amounts of taxpayers' money because the business model stinks. The government will have to stay in the business forever, not that it would bother the Obama administration.

None of this will come to pass (hopefully) if GM bondholders refuse to go along with the stiffing that they get under the plan. The holders of $27 billion in unsecured bonds would be required to convert them into shares (225 common for each $1,000 note), giving the bondholders a 10-percent equity stake in the company. Already, some observers in the industry are questioning why bondholders would want to give up more than their share of their claims in order to propel the UAW into a favored position. Bondholders have until May 25 to decide, and the betting, at least in this corner, is that we haven't heard the last of them.

We can't roll back the clock to the original auto bailouts to take the other path: bankruptcy. But a retrospective question can't be avoided: Was the necessity of taxpayers coughing up the tens of billions of dollars they "invested" in these companies to keep them afloat worth it, when the companies find themselves in much the position they were in months ago? Bankruptcy would have put the reorganization under the direction of a federal judge and his appointed trustee, thus removing it from the rocks and shoals of the politically motivated decisions now being made. Bankruptcy still can.

With the private sector equity share in GM dropping from 100 percent to an amazing 11 percent, we'll know where to put the blame when this scheme falls apart, as it will: The government/labor partnership that insisted that the company-created in their image-be kept alive, at all costs.

Dennis Byrne is a Chicago-area writer. He blogs at chicagonow.com.

Dennis Byrne

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