Fairness is the foundation of President Barack Obama’s campaign for re-election. It was the centerpiece of his 2012 State of the Union address. Fairness was the driving force behind his proposed Paycheck Fairness Act legislation, equating pay for men and women. The Buffett Rule, named for famed investor Warren Buffett and calling for millionaires to […]
Fairness is the foundation of President Barack Obama’s campaign for re-election. It was the centerpiece of his 2012 State of the Union address. Fairness was the driving force behind his proposed Paycheck Fairness Act legislation, equating pay for men and women. The Buffett Rule, named for famed investor Warren Buffett and calling for millionaires to pay at least 30 percent of their income in the form of federal tax, is yet another example.
To most people, “fairness” means free of favoritism, impartial, equitable, being just to all parties. What does it mean to President Obama? The auto bailout — which may strike you as ancient history but is being touted by the Obama campaign as a success — provides the answer. Let me explain.
The Obama Administration made the argument in early 2009 that if the federal government didn’t bail out General Motors (GM) and Chrysler, the American auto industry would collapse, resulting in massive job losses. Let’s assume the argument to be true and focus just on the bailout process.
First, the context. By 2008, the Big Three Detroit automakers — GM, Chrysler, and Ford — were in trouble. All had incurred massive debt, were committed to high labor costs (on average, $73 per hour versus $47 per hour for foreign carmakers with plants in the U.S.), supported generous retiree pensions and health-care plans, struggled with quality control, and carried overgrown dealer networks. In 2007, Ford bet the farm by pledging all of its assets to invest new funds in a turnaround that would make the company competitive. GM and Chrysler muddled along until the recession of 2008, when they came hat-in-hand to Washington to be rescued.
President George W. Bush loaned some Troubled Asset Relief Program (TARP) funds to GM and Chrysler to tide them over during the transition of administrations. In 2009, President Obama made a deal with the two supplicants: The U.S. Treasury will loan you $80 billion if you declare bankruptcy and reorganize. GM filed for bankruptcy on June 1, followed by Chrysler.
Fairness is in the details. Let’s start with some guiding principles of bankruptcy. First is the “absolute priority principle,” in which creditors’ priorities are preserved in bankruptcy in the same order as outside bankruptcy. Thus, secured creditors should have a favored position over unsecured creditors. In fact, Chrysler’s secured creditors were paid only 29 cents on the dollar while the United Auto Workers (UAW) union, which was unsecured, recovered most of the value of its claims. In short, Chrysler’s secured creditors took a haircut while the union emerged from the bankruptcy process largely unscathed.
A second principle of fairness in bankruptcy is that similar classes of creditors should get equal treatment, unless there is a compelling reason to do otherwise. The bankruptcy settlement clearly favored the UAW over other unsecured creditors. GM’s unsecured creditors, who held $29.9 billion dollars in claims, received a settlement in stock and warrants valued at only $8.1 billion at the time of issue. GM’s obligation to the UAW Retiree Medical Benefits Trust, which totaled $20.56 billion, was repaid with a total recovery of $17.8 billion. Had the union been treated equally, it would have recovered $12.2 billion less than that. No compelling reason for the unequal distribution was offered. At Chrysler, the second-lien creditors and the unsecured vendor obligations were simply wiped out of $7 billion while the union recovered $9.2 billion.
A third principle of bankruptcy is that the emerging companies should be in a competitive position to continue business after bankruptcy. This typically means wiping out any debt on the books and getting operating costs in line. To help accomplish this, Section 1113 of the bankruptcy code gives the courts the power to rewrite collective-bargaining agreements. The union did make some concessions: temporary suspension of cost-of-living adjustments and performance bonuses, restrictions on paid overtime, elimination of the JOBS bank that paid laid-off workers the majority of their full wages, and creation of a Tier 2, whereby entry-level workers were paid less than those already employed. For active UAW members, there was no reduction in base hourly pay, no reduction in health care, and no change to pensions. The resultant is that GM’s post-bankruptcy compensation package still leaves it in an uncompetitive situation. The company’s stock price is down by more than one-third from its November 2010 IPO price.
Fairness would also suggest that all unions be treated equally. Not so. The Obama Administration clearly favored the UAW. At Delphi, an auto-parts manufacturer and former GM subsidiary, some retirees of the International Union of Electrical Workers (IUE) and of the United Steel Workers unions did not receive a pension boost granted to the UAW. The 2,500 IUE former employees at the Moraine, Ohio assembly plant were denied transfers to any UAW facilities, despite their record of high productivity.
But what of the investors? Some may think that just people like Gordon Gekko and the greedy banks lost their investments. Not so. Thousands of private investors, including union workers, had investments through their 401(k)s and retirement plans in the old GM and Chrysler. The Indiana State Police Pension Fund and the Indiana State Teachers’ Retirement fund, which held Chrysler’s secured bonds, both suffered sizable losses as a result of the favoritism displayed in the bankruptcy process.
How does fairness look to the Ford Motor Co.? The firm gambled with its own assets that it could fix its problems without government help. Private capital providers agreed and loaned them the money. Smart management and a productive work force turned the company around so that it’s profitable. Now Ford, still carrying a heavy debt burden, competes with GM and Chrysler whose debt was not only wiped out but the bankruptcy judge also granted GM an $18 billion tax-credit carry-forward, something atypical of the bankruptcy process.
Some may ask why I’m writing about an action that’s more than three years old. The answer is that we, the taxpayers, now know what fairness means. The tab is at least $25 billion, the difference between what the federal government gave GM and Chrysler and the final payback. Had the Obama Administration treated all of the auto creditors fairly, the UAW would have received $26.5 billion less and the taxpayers would have been off the hook. Apparently, fairness is defined as the average taxpayer, who makes $30.15 an hour in wages and benefits, supporting a worker who earns more than $70 an hour and now maintains his former lifestyle.
Thank you, Mr. President, for defining “fairness.” Now we just need to redefine the auto bailout and call it the UAW bailout.
Norman Poltenson is publisher of The Central New York Business Journal. Contact him at npoltenson@cnybj.com