U.S. Government Sells Chrysler Stake, Losses Higher Than Reported
On paper, the U.S. lost $1.3 billion on the Chrysler bankruptcy, but the true cost is far higher than that.
The United States Government has officially sold it’s last stake in Chrysler, but the loss the taxpayers suffered is much higher than the number that’s being officially reported:
DETROIT — The federal government on Thursday shed the last of its stake in Chrysler, giving majority control of the carmaker to Fiat, the Italian company, while leaving taxpayers $1.3 billion short of recovering the full investment they made two years ago to keep Chrysler from going out of business.
The government had said in June that it expected to take that much of loss on its investment. But it has said that if it had not stepped in with a bailout and the company had been forced to shut down, the damage to the fragile economy would have been worse.
At the time Chrysler filed for bankruptcy in 2009, its prospects for survival appeared grim, even with the government’s help.
Still, the net loss on the Chrysler investment became political fodder over the terms of the federal bailout.
Representative Darrell E. Issa, Republican of California, said Thursday that the Obama administration “has sold out an American icon to a foreign company,” and is now “essentially giving that same company $1.3 billion of taxpayer money.”
The Treasury Departmentsaid in a statement that it had recovered $11.2 billion of the $12.5 billion it lent to Chrysler and that it would write off the bulk of the balance. The unpaid portion is on the balance sheet of the “old Chrysler” — a collection of unwanted assets being liquidated in bankruptcy.
That, along with the reported claim that Chrysler had repaid in full its obligations to the U.S. Government back in May simply isn’t true:
American taxpayers have already spent more than $13 billion bailing out Chrysler. The Obama administration already forgave more than $4 billion of that debt when the company filed for bankruptcy in 2009. Taxpayers are never getting that money back. But how is Chrysler now paying off the rest of the $7.6 billion they owe the Treasury Department?
The Obama administration’s bailout agreement with Fiat gave the Italian car company a “Incremental Call Option” that allows it to buy up to 16% of Chrysler stock at a reduced price. But in order to exercise the option, Fiat had to first pay back at least $3.5 billion of its loan to the Treasury Department. But Fiat was having trouble getting private banks to lend it the money. Enter Obama Energy Secretary Steven Chu who has signaled that he will approve a fuel-efficient vehicle loan to Chrysler for … wait for it … $3.5 billion.
(…)
So, to recap, the Obama Energy Department is loaning a foreign car company $3.5 billion so that it can pay the Treasury Department $7.6 billion even though American taxpayers spent $13 billion to save an American car company that is currently only worth $5 billion.
Oh, and Obama plans to make this “success” a centerpiece of his 2012 campaign.
Sounds like an incredibly bad deal, and a waste of resources, to me, especially when you combine it with the $11 billion (at least) that is being lost in the General Motors bailout.
There’s no question that Chrylser should have gone into bankruptcy. That’s something that was apparent in December 2008 when Congress, correctly, refused to grant teh bailout package that the lame duck Bush Administration was asking for. At that point, Chrysler and General Motors would have been forced to go into Bankruptcy Court but for the fact that President Bush ignored Congress and, in a move that many considered illegal, decided to use TARP funds to provide operating loans to both companies. When that money ran out and the companies had failed to solve their problems, something which was completely foreseeable of course, both companies came back to Washington for another dip in the Federal trough, which President Obama happily obliged. When even that didn’t work, both companies were forced into bankruptcy, where they should have been in the first place.
But the government’s involvement didn’t end there.
Instead of staying out of the process and letting the Bankruptcy Court adjudicate the disputes between creditors, debtors, and the unions according to existing bankruptcy law, the Obama Administration put its thumb on the scale in an unprecedented manner. First there were the billions of dollars in debtor-in-possession financing, something normally provided by private lenders, on terms that were more favorable than any private lender would have ever agreed to. Then there was the strong-arming of the secured creditors to approve a deal that required them to subordinate their interests to those of the unions. Then there was the intervention on the side of the UAW to give them a more prominent role in the process than then the law would normally allow. Then there were, as reported above, the forgiven loans and the Energy Department loans disguised as loan repayments noted above.
In the end, the process was better than a direct federal subsidization of the two companies in the manner in which they existed in 2009, but it was worse than what we would have expected had the bankruptcy process been permitted to work itself out as it normally would. Whatever that might looked like, though, it’s far from the success that the President is claiming it to be. Finally, it’s worth noting that the true costs of the auto bailout will be in the moral hazard that it has created in the minds of businessmen who see the government stepping in to bailout an industry that was unable to adapt to the changes around it, and incapable of making the decisions necessary to save itself. Now they now that if things get bad enough, Uncle Sam will step in to help, and that’s going to cost us far more than $1.3 billion.
H/T: Bruce McQuain
“There’s no question that Chrylser should have gone into bankruptcy.” In December 2008, the only possibility was Chapter 7 liquidation. None of the car companies could have gone into a Chapter 11 reorganization, because no financial institution was willing to provide debtor-in-possession financing. Rightly or wrongly, that’s what prompted the Bush administration to do what it did. I take it you believe these companies should have been liquidated.
The source for the claim is an extreme right wing rag. I doubt it can be trusted to tell you the time of day.
If you are going to challenge the US Treasury on the facts you need to use actual facts, not some kooky conservative propaganda piece.
Find a credible source for your claim and then re-write your post with facts.
The idea that there’s no cost involved in letting major companies go under in a welfare state is a bit funny.
Do unemployed people that now collect unemployment and pay zero taxes magically have zero cost? Do liquidated companies pay corporate tax?
If you’re going to make a cost benefit analysis, then make a real one. If you’re going to make some abstract ideological argument about moral hazard, then do that. But don’t try to conflate the two unless you have some hard numbers for the latter, instead of intuition.
Here’s the numbers on the costs of liquidation:
http://www.businessweek.com/news/2010-11-17/u-s-saved-28-6-billion-in-auto-bailout-study-says.html
The numbers could be wrong, but it’s nice for people to at least to THINK about all the possibilities and counterfactuals before they go on some “14 billion is a big number” diatribe.
@ken: Test reply comment. Ignore this for now.
Number 4 in the Business Insider’s Worst Trades of All Time
It is time for the Federal government to get out of the car business: no mpg mandates, emission control laws, etc. Let the experts at the car companies use their knowledge and skills freely and then you will have a real “green” car that has excellent mileage, horsepower, and is attractive; a car that people will line up for. Part of the problems that the car companies have are the results of too much government interference.
@Guthrum: Are you saying that the only reason car makers fail to make cars that reach the government’s desired MPG rating is because the government is demanding that they do? If the government simply stopped regulating, then the car companies would voluntarily do what they now claim will bankrupt them when the Feds require it?
I realize that Libertarians have a shaky grip on reality, but I’d really like to understand the thinking behind this assertion, as it seems to have no relation to the real world.
On one hand, I mostly agree with Doug’s general motivating principle: the government shouldn’t bail out failing companies, for moral hazard and other reasons.
On the other hand, at the time we bailed out the auto companies, there was a lot of worry about the consequences of allowing them to go bankrupt , including concerns about the effect on their suppliers and whether there would would be a domino effect that would drive the country into a deeper recession. And, as other people have pointed out, letting them fail would have costs of its own.
So, overall, the auto company bailouts aren’t very high on my list of things to get worked up about.
I am with Ken. Washington Examiner is a propaganda site, not to be trusted.
Even then, I am fine with the auto bailouts. When you look at the enormous amount of money wasted on Wall Street, the auto companies were a bargain. Many more jobs saved for much less money.
The key to me is they DID go through bankruptcy which is what should have happened to the banks. The CEO’s were sacked. Bankruptcy lets you shed your debt and start over. Providing debtor-in-possession financing is exactly what the govt should be doing in a financial crisis, not just giving money to companies so they can pay bonuses.
There are a lot of people through out the mid-west who have jobs today because of what Obama did. They understand what he did and they also understand that the republicans think it was a bad idea. Your damn right Obama will run on the bailouts. And the more the right wing complains about it, the better he will do. Combine this with how badly the new republicans govs are doing in the mid-west plus the fall out from the debt ceiling fiasco (TBD on that one for now) and you can see how the republicans will lose a bunch of seats through out the mid-west in 2012.
@King of Fools: The preceeding link should actualy link to the comment.
@Guthrum:
Indeed. The people profit too when a business prospers. For example:
http://www.flickr.com/photos/paul_houle/4664237642/sizes/o/
@ratufa: I think the bigger picture makes the auto bailouts even less a worrisome incident. The main question you have to ask: do you believe that Wall Street’s mismanagement, which essentially destroyed their own firms, should also directly take out a significant part of our industrial base? I think it’s very hard to let that happen as President if you can prevent it.
@lunaticllama: one more comment test
Question Doug: were you in favor of bailing out the TBF banks that were responsible for this mess?
I also am in general agreement that bailing out companies is a poor idea. BUT- there are always mitigating factors that need to be considered, as Console mentioned.
I can’t let Guthrum’s comment go by without question however.
The notion that car companies want the government to get out of their way is absurd- car companies owe their very existance to government action in favoring highways over rail, in requiring things like mandatory parking, in funding and creating regulated streets and boulevards that all align to make driving a car easier and more convenient than taking mass transit.
This is the central error in libertarian thinking- that government and business are mutually antagonistic.
In truth, they are symbiotic; government creates the infrastructure that allows business to flourish, and businesses nourish government with their tax revenue and wealth creation.
America for sale. Won’t be much left. The people in this country will be up for sale soon.
FIGHT THE CAUSE – NOT THE SYMPTOM
OsiXs (Common Sense 3.1)