The White House Changes Its Mind On Value Of Auto Bailout

Vice President Joe Biden spent much of last weekend speaking about the value of the federal government bailout of Detroit. Treasury Secretary Timothy Geithner and President Barack Obama have made similar comments. The White House undermined it own case as it released its “The Resurgence of the American Automotive Industry.”

The financial analysis of the bailout was buried deep in the document:

As of today, $40 billion has been returned to taxpayers. While the government does not anticipate recovering all of the funds that it invested in the industry, the Treasury’s loss estimates have consistently improved – from more than 60 percent in 2009 to less than 20 percent today.

The US government “invested” $80 billion in Detroit. That means its loss could be $15 billion or so.

The major flaw of the White House analysis is that the government’s support of GM (NYSE: GM) and Chrysler saved US jobs. The White House claims that the industry lost 400,000 jobs late in the Bush Administration. Additional jobs losses could have been higher than another 1 million without federal aid. That figure is based on a 2008 Administration assessment which was in turn was based on numbers from a few think tanks. All the figures are based on fantastic assumptions that could easily be wrong.

The other explanation for the success of the aid given to Chrysler and GM is that it saved the federal and several state governments huge sums in unemployment costs and lost tax revenue.

The Administration’s assumptions overlook a key fact. The assets of GM and Chrysler would almost certainly have been sold to a large foreign car company, or several, which probably would have included VW, Toyota (NYSE: TM), and Honda (NYSE: HMC). Union contracts and other obligations would have been voided in bankruptcies which would have made the assets of the two companies even more valuable. But, any buyer would have been foolish to kill brands which were decades in the making, and shut plants that were critical to production. A foreign buyer would have laid off some workers because of the harsh economic climate, but many of those workers would have been added as the industry recovered. GM and Chrysler have increased their workforces. There is no reason to assume that another owner would have done differently.

A liquidation sale of Chrysler and GM would have  eliminated the risk of $80 billion in taxpayer dollars, and the outcome in terms of jobs would have been nearly the same.

Douglas A. McIntyre