James Sherk and Todd Zywicki described, in a recent Wall Street Journal op-ed, a rather shocking and blatant sweetheart deal between this administration’s Progressives and the United Auto Workers, at the expense of two car companies’ other unsecured creditors and us taxpayers. I’ll just summarize the numbers; RTWT.
The UAW were unsecured creditors of GM and Chrysler via the UAW’s Voluntary Employee Beneficiary Association: the two companies owed VEBA $20.6 billion and $8 billion, respectively, stemming from why VEBA was created—to transfer to the union responsibility for its pension fund. Other unsecured creditors also were owed some $29 billion by these two companies. Under bankruptcy law, these two sets of creditors would have received equal shares of the bankrupts’ assets in situations where the assets were insufficient to make everyone whole. But under the Obama bailout, the UAW’s VEBA got 17.5% of the new GM and $9 billion in preferred stock and debt obligations, while the other creditors got 10% of the new GM and warrants to purchase 15% more in preferred stock. At today’s stock prices, that’s over $12 billion more than the other creditors got. With Chrysler, the imbalance was even greater: Chrysler’s non-union unsecured creditors were completely shut out—they got nada while the union got half the company and billions of dollars in a 9% promissory note. So much for equal treatment.
It gets “better.” Bankruptcy law allows bankrupts to improve their post-bankruptcy competitiveness by renegotiating union contracts to competitive rates. The Obama bailout didn’t allow this. New hires will come in, for now, at reduced wages, but the existing union employees retain their old highest-in-the-industry wages—higher by $9 an hour than their nearest competitor.
One outcome of this sweetheart deal is that, together with a little understood decision by GM to throw $1 billion at another company’s (Delphi) pension obligations, Sherk and Zywicki estimate the bailout cost was
increased…by $26.5 billion.
The Treasury expects the auto bailout to ultimately cost taxpayers $23 billion. The funds diverted to the UAW account for the taxpayers’ entire net loss.