Free Lunches Aren't So Free

General Motors announced that it is withdrawing its application to borrow $14.4 billion in loans from the federal government.

The loans are part of the government's $25 billion program to lend money at below-market interest rates to auto companies to subsidize their investment in more fuel-efficient cars.

But GM has decided that there is a price to pay for government handouts, since many car buyers have shunned bailed out GM and Chrysler, preferring to buy cars from Ford which didn't take government money.

While it may be optimistic to believe that GM's example will deter others from seeking bailouts in the future, it is good to see that the stigma from government bailouts will make others think twice before pursuing them again.

TARP Returns

The federal government sold its remaining shares in Citigroup, resulting in a total profit of $12 billion on its $45 billion investment in Citigroup during the financial crisis.

As I wrote at the time, the government's investment in financial services companies under TARP is very different than its bail out of GM, Chrysler, Fannie Mae, and Freddie Mac. The two biggest American banks, Citigroup and JP Morgan, combined to make $88 billion from 2005-2007, while in that same period the two biggest auto makers, General Motors and Ford, lost a staggering combined $65 billion. Recall these years exhibited strong economic growth.

The significance of this vast difference in pre-crisis financial performance is that the TARP investment in the big banks had a much better chance of turning a profit than the TARP investment in the auto companies.

And that is exactly how things have turned out to date.

Now They Tell Us

The U.S. Department of Transportation analyzed data recorders from Toyota vehicles in accidents they have been blamed on sudden acceleration. The result? The accelerator was engaged while they brakes were not.

In other words, the drivers mistakenly pressed the accelerator and not the brake - or at least claimed so in the accident investigation to deflect blame from themselves.

This is consistent with the government's investigation of supposed "unexplained" acceleration of Audi cars in 1989.

Out of 3,000 sudden acceleration complaints involving Toyotas and Lexuses, only one was confirmed as a problem with the vehicle, due to a floor mat issue.

Toyota, which built a highly profitable auto company without government subsidies or bailouts because it made cars people want to buy with a market cost structure, deserved better than the assault politicians and the media unleashed on the company earlier this year.

In a world where the U.S. government is a large shareholder in GM and Chrysler, it makes one wonder how much of the Toyota-bashing was driven by a desire to help the government-owned auto companies and the UAW.

GM Lies

General Motors ran an advertisement in today's Wall Street Journal saying "We've repaid out government loan. In full. With interest."

This is consistent with a column GM's CEO wrote with the same message.

There is one problem with this.

It isn't true.

The government originally lent GM tens of billions of dollars, most of which was converted into equity during GM's bankruptcy. A small portion remained as a loan.

So what GM has done is repay the small portion that remained as a loan. But the vast majority of the original loan remains unpaid as GM equity. And it is very unlikely GM will ever make enough money for taxpayers to get their money back.

If you want to buy an American car from a company that doesn't have government money invested in it - buy Ford.

So Long TARP

Being tarped is such a bad thing that banks are racing to repay government investments to escape restrictions on their compensation and business practices.

Citigroup and Wells Fargo are the latest firms to announce plans to repay the government $20 billion and $25 billion respectively.

The government may make $14 billion on its Citigroup investment, which if realized soon would work out to approximately a 30% return for a year - which is a rate of return similar to what LBO investors and venture capital firms achieve.

As I have previously mentioned, the government's bailout of the banking sector was fundamentally a different exercise than its bailout of the auto industry. One bottom line measure of that difference is the government is making money on its bank bailout, while it is deeply in the red on its bailout of GM and Chrysler.

Auo Fiasco

The Wall Street Journal reports that politicians are exerting political pressure on GM to help its constituents, under the premise that since GM took government money, it is like a government agency.

The article highlights a number of efforts by politicians that hurt GM financially, and by extension, the American taxpayer through the government's ownership stake in GM.

This is the face of socialism, where those with political pull get favors to help them economically. And with GM's vast size, there are lots of favors that can be doled out.

Where's the Outrage?

The Congressional Budget Office believes that none of the $50 billion in TARP funds used to modify home mortgages will be repaid to the U.S. Treasury.

$80 billion of TARP funds was invested in the auto companies, and GMAC just announced it needs several billion dollars more. It would be shocking if the government gets its money back, yet alone turns a profit. Staggering losses are more likely.

Meanwhile, many of the banks that received TARP funds have returned the money or have produced a profit for the Treasury.

So in a rationale world, you would expect intense scrutiny of why the government's spending on the mortgage modification and auto company investments has been squandered.

Instead, we are treated to attacks on the banks who have returned the money or where the government made a profit.

Why? Because the Obama administration and the Democrats are doing all they can to deflect attention from the government's role in causing the financial crisis, through encouraging subprime lending and the low interest rate policy of the Federal Reserve, by focusing on the employee compensation at the banks. And in the process, Obama can hand subsidies to his union supporters and people looking to restructure their mortgage obligations.

Let's Bleed 'Em Dry

Ford is running into problems with the auto workers approving concessions which the company and the UAW leadership agreed. These concessions would keep Ford competitive with GM and Chrysler, who previously won the same concessions from the UAW and its members.

Because Ford is doing better than GM and Chrysler, auto workers are thinking that they don't need to make the same concessions - since if Ford is in better financial shape, it has more room to be bled with above-market compensation.

This continues the destructive behavior that the UAW and other large unions have shown for decades, destroying companies and industries (think auto, steel, and airlines with their multiple bankruptcies) in the process.

And thanks to Obama's bailout of GM and Chrysler, Ford pays the price for its success.

Economic Destruction

Barack Obama is literally pursuing policies that cause economic destruction.

The president touts his clunker-for-cash program, that gives up to $4,500 to consumers who trade in an old, gas guzzling car in return for a more fuel efficient one.

Obama thinks the effort is a great success, because of how quickly the $1 billion program is running low on funds as car buyers race to capture the $4,500 subsidy.

Of course people are using the program - it is a big subsidy to buy a car. This isn't success. Any good or service will experience increased demand if the government subsidizes it, particularly if the subsidy expires soon.

As example, if Obama wants to stimulate the depressed restaurant sector, he could provide vouchers which pay part of a meal. Same for struggling airlines and retailers.

Moreover, another impact is that some car buyers probably deferred their purchase during the time the program was debated in Congress and pending its start - which shifts purchases between months.

It is disturbing that Obama and the Democrats are surprised at the subsidy's impact. It confirms that their knowledge of economics is limited. And it also provides more evidence that they don't know what they're doing, since they shouldn't be surprised at the result.

Moreover, the program literally entails a destruction of wealth. The cars turned in have their engines destroyed, meaning either the car is destroyed or a new engine is installed at significant cost. It may be a shocking conclusion, but the destruction of assets does not help the economy.

This is a Problem?

The explosive growth in market penetration by the iPhone, along with Blackberry and Palm's competitor products, is one of the bright spots in our current difficult environment.

So naturally, the Obama administration sees a problem with this. The Justice Department has opened an investigation into whether telecom companies are engaging in "anti-competitive" behavior by entering into exclusive relationships for a period of time (AT&T with iPhone, Verizon with the Blackberry Storm, and Sprint Nextel with the Palm Pre).

Smaller cell phone companies, such as U.S. Cellular, are complaining that their business is suffering since their smaller size makes them less attractive partners for such an arrangement.

That's what competition is: businesses try to outdo their competitors. This is a good thing, and if some businesses suffer, so be it.

So we have the spectacle that the Obama administration is shoveling staggering subsidies to the low-growth auto industry, and is investigating for a possible lawsuit the high growth smart phone business.

This is how economic recovery is delayed and growth retarded.

Chrysler Precedent

The Obama administration's restructuring of Chrysler, which overturned normal creditor rights, is now a precedent to be imitated.

For a hockey team.

A lawyer for the Phoenix Coyotes is trying to use the Chrysler case as a precedent for a similar quick restructuring.

Rather than Chrysler being an exception due to its the "importance of the auto industry", it will encourage other bankruptcy cases to follow its bad example.

The result will be a higher cost of capital and reduced economic growth, as creditors need to consider the risk that their priority in bankruptcy won't be honored and demand higher interest rates to offset the greater risk.

We Don't Need No Stinkin' Contracts*

The Obama administration has succeeded in ramming through the courts its restructuring plan for Chrysler that is long on protecting the UAW but is short on honoring the law regarding creditor rights.

The secured creditors of Chrysler are entitled to a higher settlement of their claims against Chrysler than unsecured creditors. This rule on priority is one of the fundamental tenets of our commercial laws. In return for that priority, the secured creditors lent money to Chrysler. Without that security, they either wouldn't have the lent the money, or would have done so at higher interest rates.

But honoring that legal requirement would have meant the UAW, specifically its members' retirement health care benefits, would have had to accept a lower settlement.

So the Obama administration decided that satisfying a key constituent was more important than honoring contractual rights.

The price for the nation will be diminished economic growth going forward, as all investors and lenders now have to demand a higher rate of return on future investments to offset the risk of political expropriation. This higher required return means investors will fund fewer investments and business ventures, which will reduce growth and innovation in our economy.

Since higher growth is the key to improving the standard of living for all Americans, we all became a little bit poorer with this result.

And don't be misled into thinking that if the U.S. Supreme Court didn't overturn the matter, it must be OK. Given the frenzy whipped up by the left and Barack Obama himself on various economic matters that past nine months, it wouldn't be surprising if the justices decided that the astute political move was to avoid upholding the law.

Shame on them for doing so, and even more shame on Obama and the left for deciding that paying off a political ally is more important than following the law and the well-being of the country.

* An ongoing series that looks at the assault on economic rights by the left, with previous articles here and here.

Let's Party Like its 1499

Farmers are exempt from plans to regulate greenhouse gas emissions through Obama's cap-and-trade plan.

By all means, let's dispense with the Industrial Revolution and the staggering rise in the quality of life that it has brought. Instead, let's embrace a focus on agriculture and services.

Unless, of course, you make cars employing members of the UAW.

The Three Most Important Letters in America

The Obama administration is bailing out GMAC, the auto finance arm of GM. Unlike the financial services bail out of large banks, a failure at GMAC (if it came to that) doesn't pose a systemic risk to the financial system.

So why is the Obama administration forking over up to $20 billion to save GMAC?

Could it have anything to do with what we have learned are the three most important letters in America: UAW?

Auto Czar, Truly

In the early part of this year, there had been much talk of Barack Obama appointing an "auto czar" to lead the restructuring of the auto industry given its financial plight.

The administration didn't appoint one person for that role, instead having a team of people lead the administration's restructuring efforts.

Now we know why: Barack Obama reserved that title for himself.

His decision to impose his will on American consumers and the auto makers, with his recently announced fuel efficiency standards, is worthy of a czar. Dictating to people that they buy cars they don't want to own, and forcing financially devastated auto companies to make unprofitable cars, can only happen in the hands of a government drunk on its desire to use its power to reorder how people live.

If consumers want to drive cars that get 39 mpg, which is the new standard for the average car by 2016, they would choose to buy them. More fuel efficient cars than that have existed in the past - they are small and underpowered, so don't appeal to most Americans, but it isn't a technological challenge to make them.

And since people don't want to buy such cars, they become unprofitable for the auto makers to produce. In case anyone hasn't noticed, the Big Three are desperate to make money, not lose more of it on money losing dreams of the social engineers.

The only way to prevent such loses is to impose dramatic taxes on gasoline, or provide enormous tax subsidies, so consumers are induced to buy highly fuel efficient cars. $6.00 per gallon gas, here we come.

Since Americans "vote" every day with their pocketbook, in terms of the purchases they make, and clearly prefer less fuel efficient cars, it will be interesting to see if they realize that Obama's actions are a direct affront to their own choices and preferences. My guess is many will think they can continue to buy the car they want, while it is "the other guy" who gets stuck with a car he doesn't want.

They will be in for a rude awakening.

We Don't Need No Stinkin' Rights

Chrysler's secured creditors who are banks, such as Citigroup and JP Morgan, have agreed to accept the government's proposed settlement of their debt - no doubt in whole or in part due to their status as a "tarped" firm. Since they are under the thumb of the Obama administration, they need to do its bidding.

But not all of Chrysler's secured creditors are TARP firms, and they don't like the deal the government has offerred them.

The deal upends the traditional payouts in bankruptcy, because the unsecured creditors (the UAW retirees) are getting a higher recovery rate on their liabilities than the secured creditor (the banks) under Obama's plan.

In a normal bankruptcy, the opposite occurs. This is pure wealth confiscation by the Obama administration, in support of its political ally the UAW.

The bankruptcy judge has to decide if the identities of these lenders need to be revealed, which is a problem, since some have received death threats.

This is just another obscenity that the economic downturn has led to: creditors who have the right to decide for themselves whether to accept a deal being threatened with death for not doing so. Obama's attack on these creditors as "speculators" further inflames passion on the issue, when all they are doing is representing their investors interests - as their fiduciary duty requires.

Along with the death threats made against AIG employees who received contractually agreed bonuses, this shows the naked hatred that exists in the hearts and minds of some.

If you won't speak out in their defense, don't expect anyone to speak out in your defense.

The UAW Cashes In

The extraordinary lengths to which Barack Obama has gone to preserve Chrysler's corporate existence shows the degree to which he is willing to help a key political ally, the UAW, with a massive bailout.

The auto industry was losing money during the economic boom, a sure sign of profound problems. The fundamental problem with the industry has been the restrictions the government has imposed on it, including forcing it to build unprofitable cars that Americans don't want to buy: smaller, more fuel efficient cars made in UAW-manned factories.

The fuel efficiency standards were bad enough, since it meant consumers had to be induced with low prices to buy cars they didn't prefer. But the government also mandated that such cars had to be made in domestic factories, since cars made overseas and imported into the U.S. didn't count to meeting the fuel efficiency standards - a clear payoff to the UAW.

Other damaging government restrictions include labor relations law, which gives the UAW disproportionate leverage vs the auto makers, and the new quest to force the Big Three to make unprofitable, environmentally "friendly" cars.

So now the industry has massive excess capacity: too many factories, dealers, brands, and employees. Normally, excess capacity leads to aggressive plant closures, moving production overseas, M&A deals, and if those aren't sufficient, bankruptcy.

But the UAW preferential negotiating position has prevented the Big Three from taking normal business steps to eliminate this excess capacity.

So now we are left with Chrysler being forced into bankruptcy.

In a bankruptcy untainted by government pressure or money, Fiat would be allowed to bid for those assets that it wants, which would allow many of Chrysler's plants and brands to survive. So many of Chrysler's assets would survive and some jobs - but the above-market UAW retiree health benefits and above-market UAW wage levels would suffer.

Instead, Obama is throwing another $8 billion down the sinkhole of Chrysler to preserve UAW benefits and jobs. The UAW is a reliable Democratic ally, providing money and manpower to help elect Democrats.

So your money is being spent by a Democratic president to help his allies elect Democrats. This is the result of government intervention in the market.

None of this would have happened if the government had allowed the free market to operate in the auto industry.

Auto Debacle Continues

The Obama administration's auto task force, which took five weeks to form after the inauguration despite the crisis, is reported to be set to recommend that GM and Chrysler get more aid and not be placed in bankruptcy. The task force has been scrambling to do its work, given its late start, and three of its members specialize in climate change - which means they bring an ideological commitment to having the auto makers build cars that are unprofitable because people don't want to buy them.

How comforting.

The economically rationale approach is for GM and Chrysler to file for bankruptcy, with Chrysler probably closing shop and GM shrinking in size - with bankruptcy tools making this possible.

But because this is about preserving union jobs at a key Democrat supporter, the UAW, and using the government's power to force the auto makers to make green cars when consumers don't want them, politics is trumping economics.

And we, and our children, will all be poorer because of it.

Chrysler: May it Rest in Peace

January sales figures show why Chrysler should not receive additional government funding and should liquidate. Its sales were down 55% from last January, as compared to 32% for Toyota, 40% for Ford, and 49% for GM. The company has a five month supply of vehicles just at its facilities, separate from dealer inventories.

If Chrysler shut down, it would greatly help GM and Ford as Chrysler buyers would tend to gravitate to the remaining two American-based auto makers, making them more viable and reducing if not eliminating the "need' for further government aid.

A Chrysler liquidation would be a gutsy and bold move by the Obama administration. It would also infuriate the UAW. As such, don't count on it.

Presidential Doublespeak

Barack Obama, in describing his decision to order the EPA to consider allowing states to regulate auto emissions for greenhouse gases, said:

"Our goal is not to further burden an already-struggling industry. It is to help America's auto makers prepare for the future."

While his goal no doubt isn't to add to the industry's burdens, in fact such regulations will. Good intentions are not the measure of a policy, but reality. And the auto makers, on the verge of collapse, don't need to add to their R&D budgets to develop new technologies to meet this regulatory burden nor have their most profitable vehicles (trucks and SUVs) regulated out of existence.

Moreover, Obama is disingenuous when he couches this as a forward-looking policy, when in reality the need to prepare for this "future" only exists by virtue of the new government regulation.

Thanks for the doublespeak, Mr. President.