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.

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

    FMF Policy Bulletin/ 14 June 2011
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