America's Taxpayers Lost Big in UAW Bailout

Tuesday, June 26, 2012
Todd Zywicki

The Treasury Department estimates the taxpayers will lose enormous sums in the auto bailout — more than $20 billion. That is more than Michigan spends on public education, more than the federal government spends on NASA, and more than America gives in foreign aid.

None of these losses were necessary to keep General Motors and Chrysler in business. The entire net cost of the bailout came from subsidizing the United Auto Workers' pay and benefits.

President Barack Obama argues that the bailout's losses were a price worth paying to save the Michigan economy. He calls concerns that "paying back the unions" motivated his decision "a load of you know what." But his administration ignored the principles of bankruptcy law to give the UAW special treatment.

General Motors had much higher labor costs than its foreign "transplant" competitors. Bankruptcy courts typically reduce wages and benefits to competitive rates, as happened at many airlines. That did not happen in Detroit.

While the UAW accepted huge cuts for new hires, the administration largely kept the compensation structure of existing members intact. As a result, GM still has higher labor costs than all the transplants. Even Steven Rattner, the president's "car czar" admitted: "We should have asked the UAW to do a bit more. We did not ask any UAW member to take a cut in their pay."

Bankruptcy law also calls for similarly-situated creditors to receive equal treatment. If, for instance, a person files for bankruptcy owing thousands on five credit cards, they cannot pay off one card and pay nothing on the others. The creditors must recover at the same rate. The same principle applies to bankrupt corporations, but the administration ignored it.

General Motors and Chrysler owed tens of billions of dollars to bondholders and trade suppliers. They also owed tens of billions to the UAW's Retiree Medical Benefit Trust. These debts were unsecured and all the creditors should have collected at the same rate. Instead, the UAW recovered most of its claims while the others got just a fraction of theirs — or got wiped out entirely. If the UAW had been treated equally, the bailout would have cost tens of billions less.

General Motors also inexplicably topped up the pensions of UAW retirees at Delphi, its bankrupt former parts subsidiary. GM had no legal obligation to these retirees, but spent $1 billion in bailout funds on them anyway. Nonunion employees were not so fortunate; they got nothing extra. Former members of the President's Auto Task Force are refusing to speak with the Trouble Asset Relief Program's inspector general about whether they influenced this decision.

The special treatment for the United Auto Workers did not extend to members of rival unions. GM did not top up the pensions of Delphi's United Steelworkers retirees. The Task Force also barred laid-off members of the International Union of Electrical Workers from being re-hired at other GM plants.

In total, the extra-legal subsidies to the UAW increased the cost of the bailout by $26.5 billion. They account for the program's entire net cost. None of that money was necessary to keep GM or Chrysler operating, to keep their suppliers in business, or to prevent layoffs. The taxpayer losses came solely from propping up UAW pay and benefits.

Most UAW members are grateful for this spending, and understandably so. But this was still poor stewardship of public funds. UAW members in Detroit make twice what the average worker does. Few Americans can retire at 56.

No one should begrudge UAW members this success. High pay and generous benefits are good — but they must be earned. The government should not require less well-paid Americans to subsidize UAW compensation. Especially not when Social Security and Medicare are running out of money and the national debt is skyrocketing.

The president did not need to lose billions to keep the automakers — and Michigan's economy — going. If he had given them only bankruptcy loans, the taxpayers would have broken even. Instead the president gave over $26 billion to one union. That hardly served the public good. The president did not bail out Michigan or the auto industry. He bailed out the United Auto Workers.

Obama's United Auto Workers Bailout

Thursday, June 14, 2012
Todd Zywicki

This article was originally published in The Wall Street Journal

President Obama touts the bailout of General Motors and Chrysler as one of the signature successes of his administration. He argues that the estimated $23 billion the taxpayers lost was worth paying to avoid massive job losses. However, our research finds that the president could have both kept the auto makers running and avoided losing money.

The preferential treatment given to the United Auto Workers accounts for the American taxpayers' entire losses from the bailout. Had the UAW received normal treatment in standard bankruptcy proceedings, the Treasury would have recouped its entire investment. Three irregularities in the bankruptcy case resulted in a windfall to the UAW.

First, GM and Chrysler owed billions of dollars to the union's Voluntary Employee Beneficiary Association (VEBA) when they went bankrupt. The union and the auto makers created VEBA in 2007 to assume responsibility for the UAW's generous retiree health benefits. The benefits allowed UAW members to retire in their mid-50s with minimal out-of-pocket health-care expenses for the rest of their lives. GM owed $20.6 billion and Chrysler owed $8 billion to VEBA as unsecured claims.

A bedrock principle of bankruptcy law is that creditors with similar claims priority receive equal treatment. If you owe $1,000 each on two credit cards, in bankruptcy you cannot choose to pay $900 to Citi and only $200 to Chase. Each of the creditors is entitled to an equal percentage recovery.

In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.

At the time of bankruptcy, GM owed these unsecured creditors $29.9 billion, for which they received 10% of the stock of "new" GM, which went public in November 2010, and warrants to purchase 15% more at preferred prices. Yet VEBA got 17.5% of new GM and $9 billion in preferred stock and debt obligations. Based on GM's current stock price, VEBA collected assets worth $17.8 billion—$12.2 billion more than if the administration had treated it like the other unsecured creditors.

The same thing happened at Chrysler, only to a greater degree. Chrysler's junior creditors recovered none of their $7 billion in claims. In normal bankruptcy proceedings, the UAW would have also collected nothing. Instead it walked away owning almost half of new Chrysler and a $4.6 billion promissory note earning 9% interest. Had the stock and note gone to the Treasury instead, the bailout would have cost taxpayers $9.2 billion less.

The administration also insulated the UAW from most of the sacrifices that unions usually make in bankruptcy—at taxpayer expense. Section 1113 of the Bankruptcy Code enables reorganizing companies to improve their post-bankruptcy competitiveness by renegotiating union contracts to competitive rates. In April, for example, American Airlines proposed using this power to bring down its labor costs to the level of its rivals, just as Delta and United had in earlier bankruptcy filings.

The administration decided not to do this at GM. The UAW did accept sharp pay cuts for new hires. But they only made modest concessions for their existing members, like eliminating the much-maligned Jobs Bank that paid workers even when they were laid off.

As a result, GM still has higher labor costs ($56 an hour) than any of its competitors. Indeed, Steven Rattner, the Obama administration's former "car czar," told the Detroit Economic Club last December, "We should have asked the UAW to do a bit more. We did not ask any UAW member to take a cut in their pay."

Had bankruptcy brought GM compensation in line with its competitors' (approximately $47 an hour), we estimate the resulting savings would have increased the value of the taxpayers' stake in GM by $4.1 billion. This would still leave UAW members making 40% more than the average American manufacturing worker.

Finally, GM's decision to assume certain pension obligations of Delphi, the bankrupt former GM subsidiary, also increased the cost of the bailout. New GM no longer had an obligation to support Delphi's pensions. Yet it decided to spend $1 billion to top up the pensions of Delphi's UAW retirees. Delphi's nonunion retirees and retirees in other unions did not fare so well. GM gave them nothing.

Why GM gave $1 billion of bailout funds to employees of a different company it owed no legal duty to remains a mystery. The inspector general for the Troubled Asset Relief Program is investigating whether the administration pressured GM to give the UAW special treatment, but the IG lacks subpoena power to force officials to testify. It may take a congressional investigation to establish what happened.

We estimate that these three irregularities increased the cost of the bailout by $26.5 billion. The Treasury expects the auto bailout to ultimately cost taxpayers $23 billion. The funds diverted to the UAW account for the taxpayers' entire net loss.

Avoiding these losses would have been straightforward. If the government treated the UAW in the manner required by bankruptcy law, it could have given the stock and promissory notes to the Treasury instead of to the UAW. Labor cost savings and not supporting Delphi pensions would have increased the value of the taxpayers' shares of GM, while GM would have needed less financing.

Instead, President Obama gave over $26 billion to the UAW—more money than the U.S spent on foreign aid last year and 50% more than NASA's budget. None of that money kept factories running. Instead it sustained the above-average compensation of members of an influential union, sparing them from most of the sacrifices typically made in bankruptcy. Such spending does not serve the common good. President Obama did not bail out the auto industry. He bailed out the United Auto Workers.