The Great Deformation (114 page)

Worse still, Paulson's memoir reveals a neurotically obsessed and self-appointed economic czar who had unilaterally suspended any and all free market rules until further notice. Washington would take over the auto industry for the stunningly superficial reason that the country was “in the midst of a financial crisis and deepening recession.” Accordingly, it would be inconvenient for GM to “declare bankruptcy [because] they would be doing so without advance planning or adequate financing for an orderly restructuring.”

From that moment on there was no turning back—not just from the GM loan but, more profoundly, from a permanent régime of bailout capitalism. The TARP funds allegedly provided GM with a three-month bridge loan, yet once the Bush White House blinked it was a foregone conclusion that GM would not get an honest DIP loan and that the TARP funds would become a “bridge” to a full-scale federal intervention.

The eventual, rule-shattering $50 billion bailout of a single company, which had only 62,000 US hourly workers, was thus set in motion by a Republican administration stumbling around in a spree of seat-of-the-pants interventionism. Only after the fact did the perpetrators and beneficiaries of this horrid abuse of state power invent the pretext that GM's continued existence was threatened by a total shutdown of the financial markets.

That was unspeakably false. Even a moment of calm reflection would have revealed to Paulson and his posse that GM had massive amounts of pledgeable assets. Accordingly, it needed to be told in no uncertain terms never to bring its tin cup to Washington again, but instead to market its massive collateral pool to potential DIP loan investors anywhere on the planet, no matter how unpalatable the terms and interest cost might be to the moguls in Detroit.

Such a mission would have readily succeeded because at the end of 2007, General Motors reported a giant pile of assets worth nearly $150 billion on a book-value basis. While this total was offset by an equal amount of liabilities—mainly debt, retirement obligations, and trade payables—the whole point of the US bankruptcy code under exactly this circumstance is to permit a new court-protected lender to “prime” any and all of these existing liabilities.

Stated differently, any DIP lender would have had first dibs on the entire $150 billion asset litter. This included a first lien on billions' worth of machines and tools, trucking fleets, massive factories and industrial sites, foreign subsidiaries in Brazil and China that were worth billions, brands such as Cadillac and Chevy that had not yet been ruined by generations of incompetent management at GM (despite their best efforts), and much, much more.

None of GM's financial liabilities mattered to a DIP lender—not lawsuits by injured dealers, not the contract-waving UAW labor bosses at Solidarity House, not the underfunded pensions that would be dumped on Uncle Sam, not the $25 billion that GM owed suppliers, and certainly not the $45 billion in long-term debt that GM owed to banks and bond fund managers who unaccountably still held its clearly worthless paper. In short, all of these claimants would have gotten in line behind a DIP lender had GM been forced into ordinary
Chapter 11
where it belonged.

$100 BILLION OF FROZEN LIABILITIES:

WHY GM DIDN'T NEED UNCLE SAM'S CREDIT CARD

In fact, GM didn't need a taxpayer bailout at all. The real meaning of the incantation that GM couldn't get a DIP loan is that it could not get one with single-digit interest rates, and appropriately so. General Motors was a colossal dinosaur owing to self-inflicted harm over decades. After the turn of the century, its financial statements had “shoot me” written all over them.

There is no other possible way to explain the company's staggering losses: $85 billion during the five years ending in 2008. Indeed, losses of this magnitude were almost incomprehensible, since GM's worldwide sales during that period were just shy of $1 trillion. Yet these monster sales totals, which represented the cumulative shipment of more than 35 million cars and trucks, could not even remotely cover GM's massive costs and endless write-offs.

Accordingly, its financial crisis was not owing to a temporary plunge of auto sales in the fall of 2008. GM's problem was terminal, and could only be solved through a massive downsizing and dismemberment under regular-way
Chapter 11
. As will be seen, to conduct an extended, court-protected
campaign of cost restructuring and asset liquidation, GM actually needed only a modest-sized DIP loan—one that could have been readily obtained at an interest rate commensurate with the risk, say, 15 percent or even 25 percent.

This was true because the Detroit auto business had a dirty secret. The latter was never disclosed by President Obama's so-called auto task force when it inherited Paulson's bridge; namely, that in the context of bankruptcy protection, GM did not need much fresh cash (i.e., a huge DIP loan) to operate a reduced cohort of viable plants and car lines. The Big Three business model, in fact, was to pay suppliers slowly and collect from dealers fast, thereby generating a huge float of working cash.

Indeed, GM's vast complex of suppliers was the industrial equivalent of indentured servants: their factories were filled with GM-owned tools, and in the short run billions' worth of supplier production lines were useless without these tools and GM parts orders. Accordingly, GM was able to delay payment to its suppliers for parts and materials for forty-five days after GM was invoiced, in effect using its supplier base as a $25 billion payables “bank” to finance its production cycle.

At the same time, GM North America generally had only about $5 billion of receivables because it collected from dealers within days of delivery, leaving the GM treasury with a net $20 billion piggy bank to fund its operations. The fact that it burned through this massive cash hoard near the end of 2008 was a measure of its total dysfunction, not proof that it needed a loan from taxpayers.

Upon a bankruptcy filing, this favorable payables-receivables float would have been rapidly regenerated because all of GM's pre-petition obligations, including the claims and invoices of suppliers, would have been frozen. Accordingly, any serious DIP lender would have seen that GM was readily capable of floating its own boat, once it was freed of contractual debts and cash-burning plants.

Indeed, GM was insolvent precisely because it had accumulated too many fixed contractual obligations—the very thing bankruptcy was designed to alleviate. In addition to its $45 billion of bank loans and bonds, for example, it also owed $55 billion for retiree health care, pension liabilities, and similar obligations.

Nothing could have been more obvious than the fact that this $100 billion of bad debts would be put on the chopping block. Any bankruptcy judge worth his salt could have cut that number to $40 billion or $15 billion or whatever figure a viable post-bankruptcy enterprise could support.

The “hit” for these bad debts was strictly the business of GM's unions, employees, and lenders who had made bad bargains for decades, not the
taxpayers of America who were innocent bystanders. Moreover, while the court was working toward an equitable shrinkage of this mountain of bad debt, payments would be stayed and the DIP loan would be spent on revenue-producing operations.

The fact that a $100 billion liabilities freeze was available through the regular bankruptcy process just plain destroys the spurious claim that only Uncle Sam was rich enough to keep General Motors operating. Indeed, absent the cash drain of the frozen liabilities and closed factories that would have been enabled by
Chapter 11
, GM's remaining needs for operating cash were so strikingly small that the Washington operatives running the bailout did not dare disclose this truth to the public.

At the end of 2008, for example, the company's US operations consisted of forty-seven power-train, stamping, and assembly plants which employed 62,000 hourly workers and produced product for eight different vehicle brands. Under an honest bankruptcy process, all of these metrics would have been dramatically downsized. In truth, GM has only three viable brands—Chevy, Cadillac, and GMC Trucks—and needed only a handful of plants to produce them.

In a steady-state 15 million unit US light-vehicle market, therefore, a properly downsized and three-brand GM might have profitably retained a 15 percent market share. This means that it would need to source about 2.3 million light vehicles per year—about 1.8 million from its best US plants along with about 500,000 from the efficient plants it operates in Mexico and Canada.

Based on the North American industry benchmarks published in the annual
Harbour Report
, the startling truth is that GM could produce its downsized vehicle requirements in eight US assembly plants and in an equal number of power-train and stamping facilities. That means it would need sixteen US-based plants, not forty-seven. This drastically downsized production complex, in turn, would have required a total of only 25,000 hourly employees, assuming productivity levels of about twenty-five man-hours per vehicle that were already being achieved in the company's best operations.

Moreover, under a court-supervised process, GM would have paid at most $28 per hour in cash wages. This is so because the vast bulk of the $60 per hour fully loaded cost under the UAW contract was for pensions, health care, supplemental unemployment benefits, and other contractual items which would have been frozen by the court. GM's monthly cash wage bill under a US bankruptcy scenario would have been just $100 million per month.

With a DIP loan of $10 billion, GM could have provisioned a year's worth of hourly wages and still had $9 billion available to strategically liquefy prepetition supplier payables where necessary to support production. But that's not all. It also could have covered plant operating costs, corporate overhead, marketing, and product development until its natural, large working capital float was regenerated within a few months.

In a free financial market, even under stressed-out conditions like in 2008, there is never a shortage of high-risk investors interested in earning double-digit interest rates on the kind of modest DIP facility that GM actually needed. Their funds would have been used to restart a drastically downsized but viable “GM Lite” while being protected by a $100 billion liability freeze, and collateralized many times over by GM's tens of billions of good assets.

THE GM BAILOUT: QUINTESSENCE OF CRONY CAPITALIST PLUNDER

The entire urban legend about “no DIP and no alternative” to a Washington intervention, therefore, was actually a smoke screen. The “bailout” was really about the transfer of GM's bad debts to the taxpayers, not its need for Uncle Sam's cash during a bankruptcy. And most certainly it did not involve any “need” on the part of the American economy for the company's remnants outside a potentially viable GM Lite; that is, there was no need for thirty redundant plants, 40,000 excess UAW wage workers, and its dead-in-the-water car brands like Pontiac, Hummer, Saturn, and Buick.

If a GM Lite had emerged from regular-way bankruptcy, it's likely that $30 billion of bonds would have been wiped out and that its retiree health-care plans would have been frozen at existing asset levels, not funded eighty cents on the dollar as actually happened. Likewise, the Cadillac-style UAW pension plan would have been terminated with a 25 percent benefit haircut and any remaining funding shortfall paid by the federal Pension Benefit Guaranty Corporation (PBGC).

In this respect, the argument that the bailout saved the PBGC from billions in losses is laughable. The same case could be made for rescuing every single company that files for bankruptcy if it has an insured pension plan. What the bailout actually saved was a UAW pension benefit plan that was so rich no auto company on the free market could actually afford it.

In the same manner, the bank group led by JPMorgan would have taken a severe haircut on their $6 billion loan facility, and suppliers would have eaten some of their pre-petition payables. Similarly, redundant workers at several dozen closed GM plants would have gotten the same unemployment
insurance benefits as all other American workers. The company-paid layer on top—the so-called supplemental benefits that provided 95 percent of take-home pay—would have been cut off by bankruptcy.

The ills of crony capitalism are not limited to economic inefficiency and the dead-weight costs of propping up uncompetitive companies, however. The even greater societal evil lies in the inequities: the “impressing” of innocent taxpayers into funding bad debts and economic privileges that often far exceed what rank-and-file citizens can obtain in the private market and from public programs such as unemployment insurance.

Needless to say, Republicans had no basis to support the auto bailout except rank opportunism. In voting twice for the auto bailout, Congressman Paul Ryan's conclusion that the GM's Janesville, Wisconsin, plant deserved a better fate than the verdict of the free market was dispositive.

Yet it is the progressive Democrats who were the most hypocritical. At a time when they deemed that a generous ninety-nine weeks of extended unemployment payments was good enough for 10 million unemployed American workers, the Obama White House singled out 60,000 aristocrats of labor for the extra-special privileges of the state.

The sheer facts of the North American auto industry make clear that in bailing out GM, the fundamental purpose of the Obama White House was the crass political objective of payback to the UAW. As indicated above, the bailout did not save a single net job; it just altered the allocation of automotive sales, production, and jobs among companies and regions.