James Sherk of the Heritage Foundation and Todd Zywicki of the Mercatus Center have a fascinating analysis in the Wall Street Journal today demonstrating that Obama administration’s claims that the auto bailout is a “success” is mendacious bullshit. They note that had the administration given auto unions the same treatment as other equivalent creditors, as it would have been required to do in a standard bankruptcy court, taxpayers right now would have been $3.5 billion in the black instead of $23 billion in the red.
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 [union pension fund] much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.
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.
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.
The funds diverted to the UAW account for the taxpayers' entire net loss.
Read and weep!