US Taxpayers Face Multibillion Dollar Loss from Auto Bailouts

In late 2008, then-Treasury Secretary Henry Paulson tapped the $700 billion Troubled Asset Relief Fund to lend more than $17 billion to General Motors (GM) and Chrysler. Under the strategy that was chosen, each of the companies was required to file for bankruptcy as a condition of receiving additional funding. Rather than undergo a restructuring under ordinary bankruptcy rules, however, each corporation pretended to "sell" its assets to a new entity that was set up for the purposes of the sale, says David Skeel, a professor of law at the University of Pennsylvania.

With Chrysler, the new entity paid $2 billion, which went to Chrysler's senior lenders, giving them a small portion of the $6.9 billion they were owed. If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren't, says Skeel.

A bid wouldn't count as "qualified" unless it had the same strings as the government bid – a sizeable payment to union retirees and full payment of trade debt.

If a bidder wanted to offer $2.5 billion for Chrysler's Jeep division, he was out of luck.

With General Motors, senior creditors didn't get trampled in the same way.

But the "sale," which left the government with 61 per cent of GM's stock, was even more of a sham.

The claim that the bailouts were done at little cost is even more dubious. Taxpayers are still likely to end up with a multibillion dollar bill – nearly $14 billion, according to current White House estimates. But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift, says Skeel.

Source: David Skeel, The Real Cost of the Auto Bailouts, Wall Street Journal, June 6, 2011.

For text: http://online.wsj.com/article/SB10001424052702303745304576361663907855834.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 14 June 2011