The Congressional Oversight Panel that kept tabs on the bailouts of the U.S. finance and auto industries released a final report last week. It's not exactly a ringing endorsement of the car business's future, but it tells a compelling story: just how incredibly cheap it was to save Detroit, relative to rescuing Wall Street.
The numbers don't lie. The auto industry got $85 billion in taxpayer funds. The banks got more than $300 billion. Everyone can understand what the carmakers do, and why the bailout, although controversial, was necessary: thousands of jobs and the overall health of what has been for a century the driver of the U.S. economy -- manufacturing -- were saved, at a time when unemployment was headed fast toward double digits.
And Wall Street? Well, that whole foreclosure-prevention mortgage thing is working out great now.
There's a little something called return in investment
TARP stabilized the financial system, but it saved the auto industry. Obviously, once the banks were no longer in danger of total collapse, they could seek out capital in the same ways they always have, augmenting what the taxpayer had pumped in. And of course the government had shown that it would backstop the system, so the remaining investment banks in particular could go back to high-risk financial plays. Highly paid bankers, at least, have benefited.
The automakers, however, all have bad bond ratings and were in no position to raise major operating funds after the crisis. They desperately needed the money that the government put in. On balance, having two bankrupt car companies, General Motors (GM) and Chrysler, return to relative profitability so soon after the bailouts -- and to see Ford (F) make money without assistance but while benefiting from an undisrupted supply chain -- now looks like a fantastic investment, even if it will take a while for the Treasury to get all the money back.
What does the future hold?
The COP report is skeptical about the auto bailout. It focuses on the question of whether the auto industry was truly revived, or whether the government will be back on the hook the next time the car business goes bad. But the auto companies were trying to get their houses in better order even prior to the Detroit meltdown. What were the banks doing?
Chrysler was in rough shape and might have had to be bailed out in any case. But both GM and Ford had been engaged in serious restructuring before the crisis. Ford's CEO went to credit markets prior to the Great Recession and borrowed billions to keep its doors open. And GM is now optimized to turn profits in a U.S. market of 10 million vehicles sold annually -- a condition we're not likely to see again for a generation, if ever.
The moral hazard that isn't
At the heart of the COP's analysis is a squeamishness about government intervening in the affairs of private industry. But the government's commitment to the auto industry, during its darkest hour, actually accelerated the restructuring process that was already underway. Taking the edge off a massive failure of the capitalist system is what government is supposed to do. And that it was able to effectively fix the automakers, without resorting to command-and-control type oversight, proves that America can solve its industrial problems in short order without having to pour in truly immense amounts of money.
Solving our problems with the finance sector is clearly a much more difficult matter. The nature of modern finance is to develop complex products, based on often low-quality underlying assets, and then use ridiculous amounts of Federal Reserve-enabled leverage to bet the franchise on the assumption that for every nine strike-outs, you can hit a home run.
What if McCain had won?
The dire state of the U.S. economy in 2008-2009 would have made it easy to allow the domestic auto industry to go down. The banking system was the first priority, and GM and Chrysler might exist no more if John McCain had won the election. As it stands, the U.S. auto industry is once again a robust international competitor. And the carmakers will certainly show that they have longer memories than the banks.