Carrots For Banks, Sticks For Autos
Critics of President Obama’s do-or-die plan for General Motors and Chrysler are making this a fight over fairness: Why do banks get carrots and the autos get the heavy stick?
It’s a fair question, and one likely to resonate with those who feel Obama has gone light on insurance giant AIG and bailed-out banks like Citigroup. But, based on conversations with White House officials and advisers, the president has a much more jaundiced view of the automakers – and sees limited upside for bailing them out.
Obama said in announcing his plans for the industry: “We've reached the end of that road. And we, as a nation, cannot afford to shirk responsibility any longer. Now is the time to confront our problems head-on and do what’s necessary to solve them.”
Administration officials say they are optimistic that both GM and Chrysler will continue to exist, albeit in radically altered forms. With pressure from the administration, Chrysler said it has agreed to the “framework” of a global alliance with Italian carmaker Fiat Monday, but acknowledged there are still “substantial hurdles” to a final deal.
The administration officials said they do not have different standards for banks and auto companies. Instead, the officials say, they are focused on the broad impact on the economy, and have the identical message for carmakers and the financial-services industry: “Money doesn’t come free. Money comes with conditions.”
Here are the five reasons the car companies got hit with the stick.
1. They swung and missed.
The prevailing mindset inside the White House is that both companies had a more than fair chance to prove they could present a realistic plan for survival. They didn’t come close. White House officials said Chrysler, using the most favorable assumptions, essentially proposed to stagger along and hope for a turnaround. General Motors at least offered a convincing case it could be viable, but fell far short of convincing the president’s advisers the company could do it on its own terms.
“The likelihood of failure here is too high to invest any more political or financial capital at the moment,” said a Democratic official close to the White House. “For all the negative aspects of structured bankruptcy [a likely outcome for GM], it doesn’t necessarily collapse the domestic auto industry for all of time. It will continue to exist in some form.”
The official added: ““They have more confidence in the leadership on the banking side – that there are people in place who understand what went wrong and the steps necessary to deal with this disaster. They have no sense of confidence that the auto industry has the capacity or plans to structure a workout.”
2. Bad investments = bad politics.
It is easy to ridicule the bailed-out banks, especially with reports that the companies still throw around million-dollar bonuses, buy fancy planes and throw five-star retreats for executives. But at least there’s a chance some or all the federal money they got will one day be returned to taxpayers. In fact, some banks are already talking about sending the cash back, if for no other reason than to stay clear of government-mandated restrictions on pay and bonuses.
But with GM & Chrysler, things are different—which may explain why the Obama Administration is being tougher with both firms than it has with most of the financial industry. GM already has $13.4 billion in government loans, while Chrysler owes the government $4 billion. Now, federal officials are talking about a bankruptcy filing for one or both companies.
A White House spokesperson confirmed to POLITICO that the federal government’s loans to GM and Chrysler have no special priority in the bankruptcy process. That means taxpayers will be among those headed to the barbershop and could lose as much as their entire invetment in the auto firms. With billions in tax money likely lost forever, Obama may have felt he needed to demand a scalp and tough conditions to justify any more help for Detroit.
“There’s a lot of residual frustration and anger with the automobile industry for driving itself into the ground,” said Matt Bennett, the vice president for public affairs at Third Way, a progressive think tank. “Responsibility resided at the top. They can’t compete, they’re not going forward on green stuff, they’ve done everything wrong. The administration feels they’re not admitting fundamental errors – they’re blind to mistakes that have been made.”
3. Not too big to fail.
This is the hard reality facing automakers: their failure would be devastating to their executives, workers and suppliers - but probably not to the broader U.S. economy.
Obama is convinced that if AIG or some of the big banks collapsed, the economy could go down with them. That’s not the case with Chrysler, for sure, and probably GM, too.
The president’s budget plan is focused on building a new transportation system, one dominated by a new brand of vehicles running on new kinds of fuels. The U.S. auto industry has gotten its clock cleaned when it comes to producing hybrid cars Americans are willing to buy. The Obama plan forces both companies to move faster to catch up.
“While the impact of the auto industry is huge, it doesn’t touch everyone who needs to get credit or hire someone, like the banks do,” said the Democrat close to the White House. “The optics aren’t good, but the autos are a more discrete problem that can be dealt with on a targeted basis.”
Another official added: “There’s a feeling that the failure of these two autos is already priced into the market but that really shaking up the banks could be catastrophically risky.”
Sen. Judd Gregg (R-N.H.) said it “makes no sense" to give the auto companies more money at this time, in part because "the auto industry is not a systemic industry” like the financial sector.
4. Bad products = bad investment.
The bottom line for Obama – and the auto industry – is many people don’t want American-made cars. General Motors, which is building more popular vehicles than Chrysler, has been bleeding money for years, losing $82 billion since 2004. The company made a terrible bet that SUVs were the future – just as Toyota and Honda were putting their money on hybrids and more efficient, more reliable cars.
So it’s no wonder sales are down and unlikely to rebound even if with prices lower than ever. A top White House official went as far as to point out that Chrysler doesn’t produce a single car that made Consumer Reports list of top vehicles. The White House made plain it will let Chrysler simply die if it doesn’t move quickly to cement the alliance with Fiat SpA. The reason: the company is no longer viable on its own, the government has concluded.
“You can’t allow these to be a black hole for taxpayer dollars,” said a lobbyist close to the White House. “At some point, the American people say: Enough is enough. The American people have already voted on this with their car purchases."
5. The public is demanding the stick.
It is impossible to divorce any of these bailout decisions from politics. For Obama, this is a great opportunity to show he’s intolerant of big bailouts that could leave taxpayers forever holding the bag.
He was caught flat-footed by the AIG bonus uproar, but since then Obama has presented himself as skeptical of a government-only solution and tired of business-as-usual on Wall Street. The White House used a well-choreographed rollout to dominate the news-cycle the past 24 hours with his tough love approach – and present Obama as a fair-minded entrist when it comes to bailouts.
“The politics of this are brutal,” a White House adviser said. “The president knew the Michigan delegation would be unhappy. But the politics of wasting hundreds of billions of dollars in a failed efforts to save this company are worse than the politics of allow them to die after taking real but not extreme measures.”
“Taxpayers are already in revolt over spending all this money,” the adviser added. “The image of pushing out a CEO is very helpful – very smart.””
Politico’s Manu Raju contributed.