lasting implications of the gm bailout the views expressed today are my own and should not be construed as representing any official positions of the cato institute with help from some pundits and various media outlets the administration is pitching the narrative that the auto successful the evidence in support of that conclusion seems to be limited to the fact that gm has been profitable over the last five quarters and that chrysler has repaid much of its debt to the u s treasury but calling the bailout successful is to whitewash one the diversion of funds from the troubled asset relief program by two administrations for purposes unauthorized by congress two the looting and redistribution of claims against gm's and chrysler's assets from shareholders and debt holders to pensioners three the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as sham sales four the cost of denying ford and the other more deserving automakers the spoils of competition five the costs of insulating irresponsible actors such as the united autoworkers from the outcomes of an apolitical bankruptcy proceeding sixth the diminution of u s moral authority to counsel foreign governments against similar market interventions and seven the lingering uncertainty about the direction of policy under the current administration that pervades the business environment to this very day i think if the president wants to take credit for saving the auto industry he should also take responsibility for the regime uncertainty that has persisted during his administration since much  that uncertainty which is manifest in weak business investment and hiring flows from lessons learned from the auto intervention acceptance of the administration's pronouncement of auto bailout success demands profound gullibility or willful ignorance if proper judgment is to be passed then all of the bailout's costs and benefits must be considered otherwise calling the bailout a success is like plotting the recovery of a drunken driver after an accident while ignoring the condition of the family he severely maimed the lasting implications  bailout will depend on whether or not americans ultimately accept the narrative that the bailout was a success if it is considered a success the threshold for interventions will have been lowered and americans will have to judge even more bailouts in the future if it is considered a failure as it should be the last implications will be less destructive because the threshold that tempts interventionists will be higher on that score contrary to what the administration would have the public believe gauging the success of the gm bailout requires consideration of more than just the ratio of finances recouped over financial outlays there are numerous other costs that don't factor into that equation if the bailout is considered a success some of the lasting implications likely will include the following one an increase in government interventions and bailouts of politically important entities two fearmongering will be considered an effective technique to stifle debate and enable a stampede toward the politically expedient outcomes three americans will be more willing to extend powers without serious objection to the executive branch that we would not extend in the absence of  crisis four a greater diversion of productive assets is likely to occur from productive assets to political ends such as resources for research and development engineering to lobbying and lawyering five a greater uncertainty to the business climate as the rule of law has weakened and higherrisk premiums are assigned to u s economic activity less prudent decisionmaking from ford motor company for example knowing that it has banked its bailout a greater push for the administration for a comprehensive national industrial policy and less  aversion to subsidization of chosen industries abroad the objection to the auto bailout was not that the federal government wouldn't be able to marshal adequate resources to help gm the most serious concerns were about the consequences of that intervening the undermining of the rule of law the property confiscations the politically driven decisions and the distortions of market signals any verdict on the auto bailout must take these crucial considerations into account gm's recent profits speak only to the fact that politicians committed more than fifty dollars billion to the task of subsidizing and reconfiguring gm with debts expunged cash infused and efficiencies severed ownership reconstituted sales rebates underwritten and political obstacles steamrolled all in the midst of a recovery in u s auto demand only the most incompetent operations could fail to make profits but taxpayers are still short a minimum of ten dollars billion to twenty dollars billion depending on the price that the government's five hundred million shares of gm will fetch that is a lot of public money in the balance nevertheless the administration should divest as soon as possible without regard to the stock price keeping the government's tentacles around a large firm and an important industry will keep the door open wider to industrial policy and will deter marketdriven decisions throughout the industry possibly keeping the brakes on the congressman kelly will take over for our last two witnesses mister gump you are recognized for five minutes mister gump thank you chairman jordan ranking member kucinich and members of the committee thank you for the opportunity to represent the thousands of delphi retirees who were in fact mistreated during its unprecedented intervention in the auto industry particularly in respect to the remaking of general motors i know you have had an opportunity to read my written testimony so i will summarize quickly and i want to start off by saying that i am not a lawyer  will do the best i can with some of this but you have to understand that i may not be able to get all of it right from the time candidate obama said in may of two thousand and eight that if a company goes bankrupt and workers need to be our top priority not an afterthought to the weekly radio address by vice president biden just a few weeks ago when he said we are focused on making sure that if you work hard play by the rules you will be able to get ahead put your kids through college and retire with dignity and security we have learned that talk is cheap in this town and action  d determination to do what is right is hard to come by in this situation a purposeful decision was made to create a government that was commercially minded instead of being bound by the precepts of our constitution such as due process and equal protection decisions were discriminatory and politically motivated that were made behind closed doors out of sight of any supervisory board or committee and for the last two years the records of those decisions have been protected and fiercely guarded by both the and the treasury the only explanation so far was that there was no commercial necessity to do anything for those people in reality it was done for the expediency of gm's bankruptcy exit not for the benefit of the people of the country a quick chronology would include the fact that gm was forced into chapter eleven bankruptcy by the administration delphi a gm spinoff had already been in bankruptcy for several years but remained a major supplier to gm and so was needed in order for gm to be able to survive because favor of an equity position in new delphi a onetime seventy dollars million payment from gm and a hbillion unsecured claim thus gm could keep their major supplier but the participants in the pension plans lost a great deal unlike the pensioners at general they did nothing for the groups of workers especially the salaried workers who were considered too weak to retaliate at the bad treatment that they planned but they well cared for the groups that were well organized rich and large enough to retaliate that is what is meant  commercial necessity the pbgc also followed an involuntary termination process whereby they simply took over without any adjudication or outside review thus denying us the opportunity to be represented or follow any kind of due process simply put our decades of effort for the company were considered to be valueless to this administration and so they kicked us to the curb while taking good care of their supporters the only worker group represented at the negotiating table in short this administration's unprecedented involvement from the perspective of the retirees who could not protect themselves was political illegal unethical and immoral they had the ability to treat every worker in a fair and equitable manner and they still can but they refused then and they continue to refuse to do so the longterm effects of these decisions are horrendous indeed according to a study by youngstown state university extended to include the national consequences every year one dollar sixty cents billion  economic activity has been lost and will continue to be lost every year for the next two decades or more clearly in violation of the requirements of tarp thousands of retirees have completely lost their futures they will struggle near the poverty level for the rest of their lives the lost health care insurance on top of the reduced pensions results in many not being able to pay mortgages or put their kids through college they have to compete for the same nonexistent jobs that so many others are trying to find one such person is here with me today she has to deal with several other issues including a husband who is fighting a debilitating disease she and thousands of other retirees are in an unsustainable situation others have seen their homes foreclosed they have had to declare personal bankruptcy some have seen their families break up or worse this is simply shameful and it must be corrected we need help your help to bring true transparency to this issue to reveal for all to see the records of the agreements that helped some but excluded others we need your help to achieve a fair and equitable settlement for all the delphi retirees especially the salaried retirees who worked just as hard contributed just as much and depended on the company and our government to live up to the promises made over  decades we are here because the administration believed that we were too weak to fight back but this is an issue of right and wrong it is not democrat or republican or administration versus the legislature we must not allow a precedent that allows the manner we will stand on this side of right and we will fight that is why we are here and we need your help to win mister jordan thank you mister gum thank you mister chairman and members of the committee thank you for the opportunity to testify today i am going to make three points in my testimony first government actions to restructure general motors and chrysler through controlled bankruptcy pro were essential to and successful in saving between one and three million jobs avoiding a potential second great depression and providing the pressure and the opportunity for u s firms to reemerge as worldclass competitors in the global auto industry two support of the uaw and other unions with ongoing relationships with gm during this restructuring process was critical to the survival of these companies and to the entire u s automobile industry further support and cooperation between the company and the union are essential for gm as well as for other auto industry companies for building sustainable jobs and enterprises three the specific topup provisions governing delphi hourly workers were negotiated as part of a complex multiissue multiparty agreement governing the creation of delphi in one thousand nine hundred and ninety nine and again in the restructuring negotiations during the delphi initial bankruptcy proceedings in two thousand and six to retrospectively single out and renege on this provision during the two thousand and eight and two thousand and nine restructuring and bankruptcy processes would have materially harmed the ongoing relationship between the union and company and would have jeopardiz industry's restructuring and rebuilding process let me expand on these points a bit the combined actions of the bush and obama administrations to support the restructuring of the auto industry is likely to be assessed by historians as one of the most important and effective steps taken during that perilous time to avoid the great recession from descending into a great depression the one to three million jobs saved  in two thousand and nine were probably expanded in subsequent years the actions also avoided setting off a cascading set of costs and losses of revenues to state federal and local government budgets which would structural adjustments and the additional concessions from workers and creditors the leadership changes that were put in place and in the case of chrysler the joint venture with fiat have now positioned the automobile industry to reemerge as a worldclass competitor for the first time in a decade the three companies are reporting profits are expanding capacity hiring workers and collectively gaining market share i emphasize the effects of these actions on the entire automobile industry in the u s because of the high degree of interdependence that exists across assemblers suppliers and dealers the effect of the largest firm in this case general motors entering a bankruptcy without a debtorinpossession financing option would have produced at best a long and uncertain restructuring process and at worst a potential liquidation of the company either of these outcomes would have set off a chain reaction that would likely have brought down a significant number of automobile suppliers and significantly harmed other assembly firms and even more dealers than were already harmed across the country indeed it's the interdependence across these major assemblers and base to the assemblers existed in two thousand and eight this has grown to three point five to one moreover most of these suppliers provide components to multiple assemblers delphi for example is the solesource supplier of cockpits  for vehicles in the mercedes plant in alabama if delphi had been forced into liquidation mercedes production would have been shut down this is only one of many examples of this nature ford in particular would have been put at risk by an extended and uncertain outcome of a gm bankruptcy because it outsources a higher proportion of its components to outside suppliers than does chrysler or gm instead ford not only avoided bankruptcy it used its time gained in these past several years to build a very strong partnership with the uaw that will serve as a model for the industry in years ahead let me speak to the role of the uaw in this industry the survival of gm and chrysler through these processes required the support of the uaw and other key unions with ongoing relationships with the companies moreover for these companies to prosper and to build sustainable jobs and enterprises in the future labor and management relations will need to continue to be transformed that transformation process that began prior to the crisis this involves not only deep economic concessions by the workforce it also involves joint unionmanagement efforts to work together to pull to improve quality on the shop floor to improve the quality of the negotiations process and to engage in consultation and informationsharing processes at the highest levels of the companies and the unions in two thousand and seven negotiations prior to this crisis all three of the major companies in the united states and the uaw agreed to restructure and lower the costs of health care of pensions for current and retired employees and cut starting salaries in ways that matched or came close to matching their major competitors each of these companies to varying degrees has also been working to engage its workers in building the kind of knowledgebased work systems that foster innovation productivity and quality improvements years of research and evidence and experience has demonstrated that to these companies and to the union that they need to work together as partners in leading and sustaining this kind of transformation finally this issue of the topoff is worth some commentary and it needs to be put in its historic context the uaw negotiated provisions to protect  members pensions in one thousand nine hundred and ninety nine when delphi was initially severed off as a separate company from gm at that point the union recognized there was significant risk that delphi might not survive and as a responsible union negotiated a number of contingency provisions to protect its members and retiree benefits these negotiations and subsequent ones that took place when indeed delphi was forced to declare bankruptcy in two thousand and six involve wellestablished provision in the bankruptcy code of honoring contracts of suppliers and other shareholders with critical ongoing relationships with the company this is exactly the case here finally i will close with one comment and that is this  statement has nothing to say about the question of fairness to the salaried employees as an individual as a professor who studies and works with all members all segments of the labor force i find it very upsetting that the salaried workers am a senior analyst at reason foundation a nonprofit think tank i have lived in the metro detroit area for the last twenty three years i think i am the only one here on the panel who lives in michigan and written extensively about the auto industry as a ho r in the area my fate is intimately tied to that of the auto industry and hence i am among the region's hundreds of thousands of homeowners who are rooting for the big three but i don't think that the ninety five billion or so taxpayers that th years and decades to come and i will address each of them very briefly the first is and in my view the most unfortunate aspect of the bailout is that it has completely undermined the rule of law in bankruptcy one of the main arguments for the bailout was that g and chrysler didn't have the cash on hand nor could they raise it from moribund financial markets to finance a chapter eleven bankruptcy hence if the government did not step in and bail out the companies they would face liquidation many experts doubt that liquidation was a plausible scenario for gm but if it were and gm were unable to raise private bankruptcy financing there was an argument for the government to guarantee the loan amount to private lenders which arguably would have been a lot wrote its own bankruptcy laws as it went along throwing out longstanding established precedent for example and we have talked about this earlier normally secured creditors are paid back on a priority basis in bankruptcy proceedings but the government  unions who are regarded as lowpriority unsecured creditors ahead of them the whole processes was riddled with myriad examples of unorthodox practices such flouting of bankruptcy law essentially si future lenders that should they loan money to politically important private companies they can't count on the standing rule of law to protect them additionally the other big unintended hidden cost of the bailout is the opportunity cost one of the ironies of the bailout is that it constitutes a missed opportunity not a second chance for gm and chrysler at best it has prepared these companies to compete with the industry leaders of yesterday rather than those of tomorrow american automakers have been losing market share to foreign competitors even before the current recession began and one big reason was their uncompetitive labor costs bankruptcy should have been an opportunity for them to significantly rationalize their obligations to labor unwieldy and bloated operation that supported eight brands it had amassed a debt that was twenty four times its market capitalization yet it had no cash on hand for product development or to weather a rainy day by contrast in those two years ford laid off workers sold moneylosing brands and mortgaged all its assets including its logo the blue oval to build twenty five billion in reserves that it invested in product development and for use in an economic downturn but the bailout rewarded gm's irresponsible reckless behavior and penalized ford's prudent forwardlooking one given such precedent any company that feels that it is too big to fail or is a national  icon or is deeply enmeshed in the broader u s economy or is a major regional employer will wonder whether it makes more sense for it to save for an economic downturn or hold out for taxpayer assistance just as the wall street bailout became a justification for the auto bailout the auto bailout will become justification for future bailouts and the last problem with the bailout is that it has legitimized increased government management of private companies government help means government control and given the  are not identical to those of returning the companies to profitability it was inevitable that there would be political meddling in the operations of the companies in the name of protecting jobs taxpayer investment and so on the wall street journal has extensively documented what a huge role politics played in determining which and how many dealerships the companies would shutter there are many other examples the bailout has opened the door for a kind of direct government involvement in private business myself about five minutes mister ikenson would you do me a favor and just kind of walk through the metrics of this successful government intervention in the free market and i am trying to understand because in the real world there's a different way of defining success mister ikenson yes mister kelly if you could tell me at the end of the day the total taxpayer investment versus the total loss holds about five hundred million shares of gm in order to be made whole financially for that first fifty billion the price of gm stock needs to be about fifty three dollars or the average price for selling five hundred million shares needs to be fifty three million as of this morning it's thirty dollars and it's been hovering in that neighborhood for the past several months and the reason it's not going to appreciate substantially anytime soon is because the market knows that the largest shareholder of gm stocks  am assuming that there's going to be a sale of gm and the average price of that sale is going to be around in the thirties so taxpayers are out about twelve dollars billion there then there is the tax exemptions twelve to fourteen are not the american public and i would suggest or submit to anybody that if it takes seven thousand five hundred dollars of taxpayer money to make that car viable that's probably not a car you really want in the market  that we are going through the pains of the doddfrank and i have a lot of friends in the small banks i mean can you imagine any bank being able to walk away from a forty one dollars billion loss and say you know that was a great investment only in this beltway do we come up with these types of metrics and i think it's absolutely astounding that we can say that with a straight face and as far as the american car company recovery are we also tak credit for the disaster in japan because a lot of those cars would have been sold here had they been able to be produced and i think that we are really we are making a very unstable argument for the recovery process doctor kochan you wanted to make a chairman the forty one dollars billion is a good number to use as the total cost but you have to balance that against two things first just the numbers on the low end of the savings of unemployment insurance and other government expenditures the loss of revenue that would have resulted to state and local governments and to the federal government at the low end of all of those estimates from three different sources comes to eighty two dollars billion and so substantial costs and that's the low end the liquidation costs would have been a factor of about five more than that that's liquidation this is only a long unstructured debt now the second thing that has to be considered here and you know this as an experienced person in the industry the cascading effects across the industry would have been devastating not only your dealership but many many others not only delphi but many other suppliers not only gm and chrysler ford's ceo testified that he would put he would see his company at risk so we have to take an industry kochan i agree with my colleagues on the panel we are not in the business of saving specific companies we are in the business of protecting the american economy jobs communities and the future of the industry and that's what was  so the eighty dollars billion or however much we have spent has gone to protect about four or five percent of the market share of gm and chrysler i just find it hard to believe that gm would not have survived capture that kind of market share at this stage in the game you know when car sales have been going up a little bit so you know i mean these are all counter factuals but i agree with dan that if we are going to credit gm and chrysler for saving jobs then we also need to take the cost of the broader economy of the jobs lost the very fact that the uaw's pensions and their wages have been protected more than at a competitive level suggests that we have fewer jobs in the economy because the worker cost of these workers is really quite high if we were paying them a little less you might have had more jobs in fact mister kelly yes and i can appreciate that but as i said earlier the whole purpose of the hearing today was for the american public to actually understand where their tax dollars went and there's an argument on both sides and i do understand it but i do think a lot of what we are talking about and one of the things i don't understand is we are willing to say that that is something we can write off maybe somebody can explain  value rises to the level to recoup the full investment then you would get it but we can't control the stock market i think that's where the losses come i think the direct loans have been paid and there was a debate about you know where those dollar american people to determine was their money spent properly was it spent the right way and at the end of the day did it do what it was supposed to do and a lot of it there's differing opinions on both sides and i can appreciate that but i do know one thing at the end of the day every single penny came out of the taxpayers wallet and that's my main concern and i just have this undying belief that free markets really do determine where we are going to end up and things are going to rise and fall depending on conditions which we don't really have the ability to do and there's nothing more dangerous than to you know project figure out what the future forecast what the future is going to do things do change and they change very rapidly and i know in the automobile business what looks like a really smart move one day can turn around very quickly a little thing like katrina blows in off the coast and all of a sudden gasoline that was two dollars thirty nine cents or two dollars forty nine cents goes to four dollars nine cents and a market that was one time stable goes completely upside down so there's unseen things in the future the question really does come down to the investment in taxpayer dollars and the benefit and i think there's something to be said for both sides and having said that and i know it's been a very long day i really do appreciate your appearing here and in the future i would appreciate  if you weigh in and let us know because it's really important to the american people to understand this process and how their government does make decisions and the consequences of those decisions so i want to thank you for appearing with that we are going to adjourn thank you