Credit the bankruptcy, not bailout

By James Gattuso

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The claim by Chrysler (and Fiat) CEO Sergio Marchionne that the company has paid off its taxpayer loans sparked a victory dance among supporters of the automaker bailout.

Taking a more pointed approach, the Democratic National Committee launched an ad campaign attacking opponents of the bailout. If the critics had succeeded, it contended, Detroit would have gone bankrupt.

But the pro-bailout jig is a bit misplaced.

First, Chrysler had hardly paid back its debt to the American taxpayer. Notice the careful wording in the Marchionne statement: Every penny that had been lent “less than two years ago” has been repaid. That conveniently leaves out $3.5 billion lent to Chrysler more than two years ago.

Some of this will be recouped when the government sells its remaining 6.6 percent interest in the automaker (soon, it is hoped). But even the Treasury Department acknowledges that the income will not put taxpayers in the black.

And this doesn't even count other subsidies provided to Chrysler and other automakers.

Second, it's wrong to claim that the bailouts prevented Detroit from going bankrupt for the simple reason that Detroit (or at least General Motors and Chrysler) did go bankrupt. And it was those bankruptcies - more than an infusion of federal cash - that allowed the two firms to survive.

The two automakers certainly did not have bankruptcy in their plans when they first came to Washington asking for a bailout in late 2008.

They saw federal aid as a way of avoiding bankruptcy court. And the first dollops of federal cash were given to them (during the last days of the Bush administration) with that in mind.

But that approach only extended Detroit's woes. It allowed GM and Chrysler to put off painful cuts, and creditors to evade painful losses, that were necessary to get automakers back on course.

President Obama should get credit for finally forcing the two into bankruptcy in early 2009. Unfortunately, however, it was accompanied by a massive inflow of taxpayer cash, government ownership of the two firms, and a manipulation of the bankruptcy process to help politically favored interests (notably the unions) at the expense of shareholders.

Going forward, the danger is that this intervention will become a precedent, legitimizing bailouts as a standard tool of economic policy.

Such a result would be disastrous not just to taxpayers' wallets but to the economy as a whole, as firms (and investors) evade the consequences of their own decisions.

James Gattuso is the senior research fellow in regulatory policy at The Heritage Foundation. Comments: staff@heritage.org