Free Markets, Free People

Chrysler

Capitalism, cronyism and corruption

Gallup has a new indicator poll out that shows the nation’s national priorities according to its citizens.  It’s interesting in many ways, but primarily because one of the highest calls for action is to address “corruption”. 

 

corruption poll

 

(As an aside, notice the bottom two “priorities).

Notice carefully how the corruption question is phrased – “Reducing corruption in the federal government”.  What sort of corruption?  Well, one type, that most fair minded people would identify, is that which we call cronyism.  As we listen to the uniformed continue to say we’ve been ravaged by the “free market” system, one can only shake their head in wonder that anyone would identify what we have as a “free market system”.  Rarely, if ever, are markets allowed to function as they should in this country (or any others for that matter). 

What we have is a system of cronyism (I’m removing “capitalist” from the description since there’s nothing “capitalist” about such a system) that is part of what is killing us economically.  David Henderson gives us a good description of the system under which we must operate.

What is the difference between free markets and cronyism? In free markets, buyers and sellers are free to agree on price; no government agency restricts who can buy or sell, and no one is told how or what to produce.[1] In contrast, under cronyism the government rigs the market for the benefit of government officials’ cronies. This takes various forms. Governments sometimes grant monopolies to one firm or limit the number of firms that can compete. For example, most U.S. municipalities allow only one cable company to operate in their area even though there is no technological reason more could not exist. The same is true for most other utilities.

Governments sometimes use quotas or tariffs to limit imports with the goal of protecting the wealth and jobs of domestic producers who compete with those imports. President George W. Bush did this in 2002, for example, when he imposed tariffs ranging from 8 to 30 percent on some types of imported steel.[2] Governments sometimes subsidize favored producers, as the Obama administration did with the politically connected solar-energy firm Solyndra. Governments may use antitrust laws to prevent companies from cutting prices so that other, less-efficient companies can prosper: For example, beginning in 1958, the U.S. government prevented Safeway from cutting prices for a quarter of a century.[3]

The entities governments help with special regulations or subsidies are not always businesses; sometimes they are unions. The federal government’s National Labor Relations Board’s (NLRB) complained against Boeing in April 2011, for example. In response to a complaint from the International Association of Machinists and Aerospace Workers (IAM), the NLRB sought to require Boeing to produce its 787 Dreamliner in Washington State rather than in Boeing’s chosen location of South Carolina. According to the NLRB, by saying that “it would remove or had removed work from the [Puget Sound and Portland] Unit because employees had struck” and by threatening that “the Unit would lose additional work in the event of future strikes,”[4] Boeing was making “coercive” statements to its employees. As a matter of fact, it was not. Boeing was simply telling the employees some likely consequences of the union’s actions.

The Boeing-IAM case is not as simple as most of the press implied. It turns out there was a prior case of cronyism. The government of South Carolina promised Boeing “$900 million in tax relief and other incentives” in exchange for moving production to South Carolina.[5] Such is the tangled world of cronyism.

As we discussed on the podcast last night, we have given, or at least allowed government to amass, power to do what it is doing.   We have, over the years, allowed them to use tax exemptions and other favors, etc. to lure businesses to our states (and we’re then thankful for the jobs created) not understanding that by doing so, we empower politicians to be the decision makers in areas that should be the function of markets.  And what does that foster?  A culture that is incentivized to seek out politicians to grant such favors.   To ask for, and receive, subsidies.  To allow politicians to leverage that power into favoring businesses that fit their political agendas.   They become the focus because we have given them the power necessary to grant those favors.

We see the same sort of game played at a national level as described by Henderson.  That has nothing to do with capitalism folks.  It has nothing at all to do with “free markets”.  In fact, it is the antithesis of both.

Probably the most blatant and disturbing example of cronyism came in the auto bailout:

Of course, a much larger instance of cronyism under the Obama administration, one that makes the Solyndra case tiny by comparison, is the bailout of General Motors (GM) and Chrysler. Bush and Obama together diverted $77 billion in TARP funds to GM and Chrysler. In organizing their bailouts and bankruptcies, Obama  violated the rights of Chrysler’s creditors and gave a sweetheart deal to the United Auto Workers union.

Law professor Todd Zywicki provides the details:

In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the “absolute priority” rule— since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company’s secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers—unsecured creditors, but possessed of better political connections—received more than 40 cents on the dollar.

Pure cronyism.  The bankruptcy rules were thrown out by government in order to pay a favored constituency – labor.  Henderson explains:

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a “deficiency claim”—the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the creditors. Were bankruptcy experts to comb  through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.20

Why did the Chrysler bondholders not object? Many did. But, Zywicki notes, the federal government (in this case, the U.S. treasury secretary) had enormous power over financial institutions through TARP, and these institutions owned much of  Chrysler’s secured debt.

While this has been going on for quite some time, never has it been as blatant as with this administration.  And that blatancy is what has pushed the corruption priority up the list to where it stands second to job creation in this horrific economy.

What can be done to remedy this cronyism “corruption”.  Only one thing, and unfortunately, those enjoying the power are where the remedy must come:

There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power. To reduce cronyism, we must abolish regulations and cut or abolish special government subsidies. That way, there is nothing to fight about. For example, the government should not bail out companies or give special subsidies and low-interest loans to companies like Solyndra that use technologies or produce products that the government favors. It should have unilateral free trade rather than tariffs, import quotas, and other restrictions on imports.

Will it happen?  No.  Those who tout the power of markets and demand they be given priority are now considered “radicals”.  Just listen to President Obama talk about the former administration and try to convince you “we tried their way before and look where it led”.    Spinning a regime prior to his that was as wrapped up in cronyism as is his and claiming it represented free markets is standard, disingenuous, leftist boilerplate with nary a leg to be found standing in reality.  It is pure, fatuous BS.

The “corruption in the federal government” isn’t lobbyists.  They’re a  symptom of that corruption.  The problem resides under the Capital dome and within the offices of the executive branch.  They have the power that is sought by the lobbyists.  No power and there would be no petitioners.   Instead, we see the number of petitioners for favorable treatment by government (usually at the detriment to their competitors) continuing to expand.

So while the public has finally identified a major problem (thanks to the blatancy of this administration) it has a long way to go before it realizes the means by which it must be fixed.  Stripping the federal government of its power to grant favors to its cronies is almost an impossible task, given we have the fox in charge of the hen house.

I see nothing in the future that says those who must fix this are willing to divest themselves of the power to grant favors (see recent farm bill, an orgy of subsidies and pay offs (earmarks), for a perfect example).   Show me when they’ve ever divested themselves of any meaningful power they’ve accrued.

And so cronyism will continue and we will continue to circle the drain of economic collapse.    Meanwhile, Coke and Pepsi will fight about the marginal nonsense that won’t make a significant difference and make all the usual promises about being the panacea for all our ills that voters have been pining for so long.

Or it is “kick the can down the road” politics as usual.

Happy Monday.

~McQ

Twitter: @McQandO

Obama’s UAW speech fantasy, Kaus’s auto industry reality

Trying to justify the unjustifiable with a pep-rally like political speech to the UAW, Obama points to what he contends are the favorable results of his decision to intrude into the auto market and rearrange the bankruptcy process to favor his cronies.

I know our bet was a good one because I had seen it pay off firsthand.  But here’s the thing.  You don’t have to take my word for it.  Ask the Chrysler workers near Kokomo — (applause) — who were brought on to make sure the newest high-tech transmissions and fuel-efficient engines are made in America.  Or ask the GM workers in Spring Hill, Tennessee, whose jobs were saved from being sent abroad.  (Applause.)  Ask the Ford workers in Kansas City coming on to make the F-150 — America’s best-selling truck, a more fuel-efficient truck.  (Applause.)  And you ask all the suppliers who are expanding and hiring, and the communities that rely on them, if America’s investment in you was a good bet.  They’ll tell you the right answer. 

Of course Chrysler is now owned by a foreign auto company, courtesy of the Obama administration, Ford took no federal money and, had normal bankruptcy proceeded, taxpayers wouldn’t be out $80 billion dollars (still unpaid despite claims to the contrary) and a leaner, more competitive GM would be in existence.   Those suppliers would still be supplying and after the shakeout a more viable corporation would have come into existence.

uaw-gmInstead, the same GM is in existence boosted by taxpayer money.  As Micky Kaus points out, “You’d be successful in the short run too if the government gave you $80 billion dollars.”

Speaking of those GM workers in Spring Hill, TN, Kaus lays out another reality that the president doesn’t present:

Toyota and Honda are coming back online after the tsunami and Southeast Asia floods crippled production. VW is building roomy American-style cars in Tennessee using $14.50/hour non-union workers instead of $28/hour UAW workers. Hyundai is expanding rapidly. Competition is going to be vicious–it’s widely believed there’s still overcapacity in the industry. A new oil price spike could crimp sales of high-profit trucks. Will GM still be making money in 5 years? Or, I should say, will GM still be making money building cars in the U.S. (as opposed to importing them from China) in 5 years? I’m skeptical. I don’t think deficient corporate cultures change that easily. Normally we rely on the market to simply kill them off.

The two points to be made here are important.   One, GM’s current “success” is a result of huge infusion of taxpayer money.  Its problem was/is its corporate culture and its unions.  Neither problem have been addressed or fixed.  Instead, like Solyndra, they’ve simply been given an extension via the taxpayer that will eventually run out.  Secondly, as competing auto companies  using non-union labor continue to locate in right to work states and pay a competitive wage (but not the high end union wage), they will continue to take market share from GM, who is still stuck with that toxic corporate culture and grasping unions.

But, of course, Obama won’t care because he’ll be out of office.  This is the usual short term vote buying, just on a grander scale than we’ve ever seen it before.  Crony capitalism at its worst.

Long term viability?

Who cares?  Certainly not President Obama.

~McQ

Twitter: @McQandO

Chrysler cost taxpayers much more than the reported 1.3 billion loss

CNN Money headlines an article “US loses 1.3 billion exiting Chrysler” and then says:

U.S. taxpayers likely lost $1.3 billion in the government bailout of Chrysler, the Treasury Department announced Thursday.

The government recently sold its remaining 6% stake in the company to Italian automaker Fiat. It wrapped up the 2009 bailout that was part of the Troubled Asset Relief Program six years early.

"The fact that the company has done so well — that they were able to go out and raise private capital to repay us the loan so quickly, is really the big story," said Tim Massad, Treasury assistant secretary for financial stability.

If the company has done so well, why are taxpayers out $1.3 billion?

Well apparently because the government couldn’t wait to sell their shares to a foreign company, Fiat, giving the Italian automaker a majority share in Chrysler:

Fiat paid the Treasury a total of $560 million for the remaining shares, as well as rights to shares held by the United Auto Workers retiree trust. Fiat now owns a 53.5% stake in the company.

And CNN continues to propagate the myth that Chrysler paid back its loans early:

Originally, the government committed a total of $12.5 billion to the struggling automaker, Old Chrysler, and the company’s newly formed Chrysler Group. Of those funds, $11.2 billion have been returned through principal repayments, interest and cancelled commitments, the Treasury said. The new Chrysler Group paid back $5.1 billion in loans in May.

Actually that’s not at all the case:

The Obama administration already forgave more than $4 billion of that debt when the company filed for bankruptcy in 2009. Taxpayers are never getting that money back.

[…]

The Obama administration’s bailout agreement with Fiat gave the Italian car company a “Incremental Call Option” that allows it to buy up to 16% of Chrysler stock at a reduced price. But in order to exercise the option, Fiat had to first pay back at least $3.5 billion of its loan to the Treasury Department. But Fiat was having trouble getting private banks to lend it the money. Enter Obama Energy Secretary Steven Chu who has signaled that he will approve a fuel-efficient vehicle loan to Chrysler for … wait for it … $3.5 billion.

[…]

So, to recap, the Obama Energy Department is loaning a foreign car company $3.5 billion so that it can pay the Treasury Department $7.6 billion even though American taxpayers spent $13 billion to save an American car company that is currently only worth $5 billion.

There’s your story.   Taxpayers mugged again by the Obama administration.  Film at 11.

~McQ

Twitter: @McQandO

“Obama saved the car industry with bailout” narrative begins to form

Ron Klain, former Chief of Staff for Joe Biden (and a Bloomberg View columnist) gives you a peek at the plan.  Klain has a piece in Bloomberg where he puts the outline of what the administration needs to do to spin the car bailout properly if it hopes to make it a campaign positive.  Klain’s suggestions are offered to form the basis of a narrative which will be polished and become a center-piece of the record of Barack Obama.   The reason for beginning now is obviously an attempt to condition the public, which was very much against the bailout (and mostly remain so), to the supposed positive aspects of the takeover by government.

Of all the policy challenges I saw Obama tackle in my two years in the White House, none was more complex than turning around the U.S. auto industry. When the president took office, the industry was in free fall. Sales of cars and trucks, which had topped 17 million in 2006, fell to 10.6 million in 2009. Two of America’s three major automakers were insolvent, kept alive by weekly inflows of federal cash. U.S. automakers had an unsustainable cost structure, were badly trailing their foreign competitors in the production of fuel-efficient and electric vehicles, and seemed unable to make the hard choices needed to arrest their downward spiral.

The course the president chose was unexpected and risky. Most Americans remember that the administration decided to "bail out" the car companies — and indeed, the president did extend more loans and support to the industry. But he attached to the aid a series of controversial and painful conditions that ended business as usual in Detroit.

Call it “gutsy call II” if you will, but in reality, it is far from the picture that Klain ends up painting.  Both the car companies were headed toward bankruptcy – a financial condition they had earned by their poor practices and sellouts to unions.   Obama’s bailouts certainly ended “business as usual” for those two companies but not in a positive way.

One of the consistent memes is that had Obama not acted, GM and Chrysler would have gotten the equivalent of a death sentence by having to go into bankruptcy.  By death sentence I mean the administration and its bailout supporters imply millions would have been thrown out of work and those two companies would have forever disappeared.

Uh, no.  As Jim Manzi at NRO explains:

First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits, and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits, and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?

And what would have come out of the bankruptcy?  Leaner companies better equipped to address the market and turn a profit.  What wouldn’t have come out of the bankruptcy are the level of union pensions and benefits the administration preserved.  Obama, through his bailout and modified bankruptcy made sure those were weren’t destroyed.  Consequently you have pretty much the same conditions that existed prior to the bailout still in existence today with the added twist of more union control. 

GM, for instance, just before it announced it had “paid off” its government loans, lost 3.4 billion dollars.  Hans Bader, of the Competitive Enterprise Institute destroys the myth of GM’s loan payback with an extensive investigation into the real story.  It is a story of known falsehoods being tacitly approved by the White House and the Treasury Department because the administration was desperate for some good news at the time.  The Chrysler loan payback, as I noted recently, is of the same stripe.  More smoke and mirrors from the “transparent” administration.

But back to the bailouts and the reasons.  The defense offered for the bailout is this:

The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.

Again, that assumes nothing comes out of any bankruptcy proceedings.  Nothing.  And, as Jim Manzi of NRO explains above, that’s simply not how it works.   It is an assumption without any real world foundation.   We’re talking a zero sum assumption by the administration where no assets are bought, no one goes back to work, everyone is unemployed and no one can find a job.   That’s just not the way bankruptcies (or the real world) work.

Also:

Second, some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?

Anybody who tells you they can answer all of these questions reliably is full of it.

Indeed.  Again, the White House and its cronies must push the black and white version of this to make it saleable.  If they can’t make you believe in their “either/or” scenario, then they can’t sell the lie.   They’re banking on a large degree of economic ignorance to sell this.  But they know that if they rely on the fact and figures they’re going to end up on the wrong side of the argument.  So Klain says, break out the smoke and mirrors once again – sell it on emotion:

First, tell the story with fewer numbers and more emotion; less prose and more poetry. Rescuing the auto industry isn’t just a matter of saving jobs and factories — it means preserving a uniquely American manufacturing tradition. Cars are more American than apple pie or hot dogs (which, unlike the automobile, were both invented in Europe). We couldn’t have won World War II without this "arsenal of democracy"; as Walter Reuther famously said, "England’s battles were won on the playing fields of Eton, but America’s were won on the assembly lines of Detroit." The president needs to jujitsu Republican critics who accuse him of failing to understand American exceptionalism by pointing out his success in saving this exceptionally American industry.

You have to love the fact that even Klain doesn’t believe his own nonsense, but has no problem advising the president to use it.  Note too that Klain seems not to remember that one of the reasons that GM and Chrysler were on the ropes had to do with the American public choosing competitive foreign cars over the American cars from those two companies (and with the VOLT, we see GM again in the same condition.   But he feels if he wraps it all in emotions and not facts (a variation on “hope an change” that worked so well in 2008), they can fool enough voters into accepting the narrative or at least, not caring about it.

Second, equally emphasize the pain that was imposed as a condition of support, and the hard and unpopular choices the president made. It was a plan of “shared sacrifice,” in which executives were fired, workers lost jobs, benefits and pay were cut, and dealers were shut down. The story of the tough choices the president made along the way must be told to convince the public that this wasn’t a handout.

Of course, this plays into the part of the narrative in which you must believe their “either/or” scenario – that is had the government not acted, millions of jobs would have just vaporized.   Of course, what Klain describes above would most likely have been the result of normal bankruptcy proceedings minus the $50 plus billion government money injected into GM.  They don’t what that known though.  And, naturally, they don’t want any speculation about what would have emerged, how many jobs would that would have entailed, etc.

If you start down that road and use the history of bankruptcies and the emergence of companies from that situation as a basis, you’ll have a very difficult time swallowing the administration’s story.  So avoid those facts at all costs and concentrate on “emotion” and “pain”.

Finally – Klain advises the White House to crank up the propaganda:

Third, let the people of the auto communities tell their own stories — encouraging homegrown viral videos and other uses of social and new media. This is a lesson I learned the hard way during the 18 months I was part of the White House team that struggled to explain the benefits of the Recovery Act. We used visits by the president and vice president, videos posted on WhiteHouse.gov, as well as endless statistics and charts and maps and graphics on Recovery.gov — and yet nothing got the job done. Finally, two ice-cream shop owners made an iPhone video that told the story better than we ever had, by showing how a single small business loan rippled across their area to create jobs in countless other businesses.

The White House needs a similar personal narrative to tell the auto rescue story, or it will risk being denied a return to Victory Lane in 2012.

So there is the plan – “emotion, pain and propaganda” – that Klain claims the administration should use to sell something that is about as un-American as the internment of Japanese/American civilians during WWII.  The most interesting part, of course, is Klain understands that if  they get into the specifics of this “deal” and the facts come out, it ends up looking like a very poor decision.  And Klain knows that the opposition, once it finally settles on a candidate and its own narrative, is going to seize on this subject as a part of their attack on the Obama record.

He instinctively knows that any chance of blunting that, or making it a non-issue, requires that the administration’s narrative be out there actively being pushed now and that it has to be spun properly for it to work.

How do you counter this?  With facts.  And the facts are aplenty.  There is no shortage of factual information that can gut these arguments and show them for what they are  – emotion and propaganda.  The opposition also has to use “American exceptionalism”  in its proper way and point to the fact that the administration misusing “exceptionalism” in its version. 

And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).

One of the things America prides itself on is “rule of law”.  That is a large part of our exceptionalism.   We also founded a country that attempts to avoid the moral hazards that abound in this sort of a situation.  We are and for the most part always have been a meritocracy.  You get what you earn.  We don’t buy into exceptions because they’re “too big to fail”.  We understand that freedom means the freedom to fail and we don’t bail out –selectively- failures.  We don’t throw good money after bad, and we certainly don’t expect our government to interfere in that process.

~McQ

Twitter: @McQandO

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The fake Chrysler loan “payoff”

You probably remember when GM made the big announcement that it had paid off its loans from the bailout?  You most likely also remember that subsequent investigation found that GM was simply using borrowed money from a government extended line of credit to “pay back” part of what was loaned under the bailout?  In other words it took taxpayer money extended under the LOC and gave it to the government as a payment of “debt”.  Overall, though, it’s debt remained the same.

This week Chrysler went through the same sort of shenanigans as Conn Carroll reports:

American taxpayers have already spent more than $13 billion bailing out Chrysler. The Obama administration already forgave more than $4 billion of that debt when the company filed for bankruptcy in 2009. Taxpayers are never getting that money back. But how is Chrysler now paying off the rest of the $7.6 billion they owe the Treasury Department?

The Obama administration’s bailout agreement with Fiat gave the Italian car company a “Incremental Call Option” that allows it to buy up to 16% of Chrysler stock at a reduced price. But in order to exercise the option, Fiat had to first pay back at least $3.5 billion of its loan to the Treasury Department. But Fiat was having trouble getting private banks to lend it the money. Enter Obama Energy Secretary Steven Chu who has signaled that he will approve a fuel-efficient vehicle loan to Chrysler for … wait for it … $3.5 billion.

This is simply more smoke and mirrors from the “Smoke and Mirrors” administration, now engaged in pre-election image burnishing.  In fact, the payback (someone call Debbie Wasserman Shultz) involves allowing a foreign auto company to take more control of Chrysler and then tossing a loan for 3.5 billion from government on top of the Fiat purchase of Chrysler stock at a reduced price.

They want you to believe this signals a stronger and profitable Chrysler.  In fact, it is a pathetic attempt to fool the public.

But it is even worse than that:

So, to recap, the Obama Energy Department is loaning a foreign car company $3.5 billion so that it can pay the Treasury Department $7.6 billion even though American taxpayers spent $13 billion to save an American car company that is currently only worth $5 billion.

Oh, and Obama plans to make this “success” a centerpiece of his 2012 campaign.

Again, don’t forget the $4 billion in loans the Obama administration has “forgiven” that taxpayers will never get back – all in an effort to make this truly horrendous deal for taxpayers seem better than it is so he can claim credit for “saving the US auto industry” during the coming political re-election campaign.

~McQ

Twitter: @McQandO

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Politics 101

One of the basic laws of politics, which even the kid running for class president should know, is if you’re going to bash your opponent on an issue, you’d better have your ducks in a row on that issue or it is you who will come out looking idiotic.

Debbie Wasserman Shultz, the chairwoman of the DNC, recently tore into the GOP presidential contenders who were opposed to the bailouts for GM and Chrysler.

"If it were up to the candidates for president on the Republican side, we would be driving foreign cars; they would have let the auto industry in America go down the tubes," she said at a breakfast for reporters organized by The Christian Science Monitor.

As you’ve probably already guessed Wasserman Shultz doesn’t drive an American car, and certainly not a GM or Chrysler model.  Nope – she drives an Infinity.  It’s up to the little people, apparently, to “buy American”.

There are several ways Wasserman Shultz could have approached this issue without inserting “foreign cars” into the mix.  But she didn’t.  Apparently she didn’t think about her words at all before she spoke out.   She comes from the “blurt and backpedal” school of politics which makes for great blogging fodder for those of us out here in the blogosphere. 

Of course, the fact is the federal government shouldn’t have been involved in the bailouts and had the two car companies gone into bankruptcy, they’d have most likely emerged by now, leaner, meaner and more fiscally sound.   As it stands now, we simply don’t know if they have the long range fiscal soundness they need to compete and make a consistent profit because, that process was interrupted and we ended up subsidizing failure and discouraged future investors with the way the previous investors were treated (compensated) and how ownership was then divided.

"They can try to distract from the issue if they want," said DNC spokesman Hari Sevugan. "But if Republican opposition researchers are snooping around garages, they should know that if Republicans — who said that we should let the U.S. auto industry go bankrupt — had their way, they wouldn’t find a single American made car anywhere."

Uh, hello in there – Ford? 

~McQ

Twitter: @McQandO

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That Was Then. This Is Now.

So, the deal was supposed to work like this: The government takes over Chrysler, then sells a big chunk of it to Fiat.  In return, Chrysler would give us all these cool, American-made electric cars that would turn the planet sparkly, and make the unicorns smile.

6 April 2009:

If you’re tooling around in a Chrysler electric vehicle in a few years, you’ll still be driving an American car.

While some other companies are looking to foreign battery suppliers, Chrysler said Monday that it’s going to stay all-American. It announced it is choosing A123 Systems, a Massachusetts company, as its battery supplier. A123 will make the battery packs for Chrysler’s wave of electric vehicles at a new plant in Michigan. The first will hit the streets in 2010, says Lou Rhodes, vice president of advanced vehicle engineering for Chrysler. With Monday’s announcement, Chrysler is “that much closer” to getting its vehicle on the road.

Of course, the news that it could generate more American jobs could play well in Washington, D.C., where Chrysler is under the gun from the Obama administration to close its deal with Italy’s Fiat and take other drastic steps if it wants up to $6 billion in additional government loans.

How’s that working out for us?

11 November, 2009:

Chrysler has disbanded the engineering team that was trying to bring three electric models to market as a rush job, Automotive News reports today. Chrysler cited its devotion to electric vehicles as one of the key reasons why the Obama administration and Congress needed to give it $12.5 billion in bailout money, the News points out.

The change of heart on electric vehicles has come under Fiat. At a marathon presentation of Chrysler’s five-year strategy, CEO Sergio Marchionne talked about just about everything on Chrysler’s plate last week except its earlier electric-car plans. With the group’s disbanding, Chrysler’s electric plans will be melded into Fiat’s. Marchionne is apparently no fan of electric power:

He says electrics will only make up 1% or 2% of Fiat sales by 2014 and that he doesn’t put a lot of faith in the technology until battery developments are pushed forward.

Now, the unicorns are crying.  And considering the money we shelled out, we should be, too.

If you’re tooling around in a Chrysler electric vehicle in a few years, you’ll still be driving an American car.

While some other companies are looking to foreign battery suppliers, Chrysler said Monday that it’s going to stay all-American. It announced it is choosing A123 Systems, a Massachusetts company, as its battery supplier. A123 will make the battery packs for Chrysler’s wave of electric vehicles at a new plant in Michigan. The first will hit the streets in 2010, says Lou Rhodes, vice president of advanced vehicle engineering for Chrysler. With Monday’s announcement, Chrysler is “that much closer” to getting its vehicle on the road.

Of course, the news that it could generate more American jobs could play well in Washington, D.C., where Chrysler is under the gun from the Obama administration to close its deal with Italy’s Fiat and take other drastic steps if it wants up to $6 billion in additional government loans.

SCOTUS Temporarily Halts Chrysler Sale To Fiat

And Ruth Bader Ginsberg granted the halt (I wonder if she issued the stay on empathetic grounds or legal grounds?).

The “greedy speculators” who requested the stay were somewhat happy:

Indiana Treasurer Richard Mourdock said the ruling was a small victory for Indiana pensioners, who brought the request for an injunction for fear of losing their stake.

But, like I said, this is a very temporary stay:

In order for the stay to have a more lasting effect, five justices need to sign on it. That has not happened, or at least not yet. The court may yet deny the emergency request or grant it and await arguments about why it should actually hear an appeal.

However, that should be more than enough time for the usual suspects to demonize the firemen, police officers, teachers and blue collar workers greedy speculators and their desire to destroy the UAW auto industry for their pension funds 20 pieces of silver.

In fact, it has already begun:

Rep. Gary Peters, D-Mich., whose congressional district is home to Chrysler world headquarters, said the state of Indiana pension funds’ attempt to stop the sale is an effort to prevent a swift emergence from bankruptcy in the name of a small sum.

Indiana’s pension funds would lose $4.8 million if Chrysler is allowed to emerge from bankruptcy, Peters said, while the state will lose more than $20.7 million in tax revenue if Chrysler is liquidated, as well as incur tens of millions in lost revenue, expenses and new unemployment claims.

“Other stakeholders, including other secured lenders and Chrysler’s autoworkers, accepted shared sacrifice because they recognized their interest was better served keeping Chrysler alive rather than forcing liquidation. Why the officials who decided to take their objections all the way to the Supreme Court can’t recognize this is beyond me,” Peters said.

IOW, Michigan’s greed is much more acceptable than is Indiana’s. And besides, the powers to be have already made up their mind that the “greedy speculators” in Indiana should just shut up and accept the rape of their pension funds because the interests of others are “better served” if they get screwed vs. Michigan.

Nice.

~McQ

Dealergate and Statistics

Yet another statistical analysis of the Chrysler dealership closings has been conducted, although this one appears to be both much more thorough (albeit preliminary) and concentrated on the correct data (my emphasis):

To start with, we pulled raw donor data from The Center for Responsive Politics / OpenSecrets.org for the 2008 election cycle and extracted ~865 megabytes of 2008 individual contribution (“IC”) cycle table entries.

[…]

… this particular output is the widest available dataset on contributions. We matched this data against two Chrysler dealer lists:

First, Docket #797 “Document #3″ “Schedule of Designated Domestic Dealer Agreements and Cure Costs Related Thereto” (a list of dealers expected to survive).

Second, the famous “Exhibit A” document of dealers to be closed.

[…]

We ran binary logistic regressions across the variables. The results are interesting but the most dramatic was saved dealers v. donations by candidate and/or party.

The results of the analysis suggest that donors to Hillary Clinton in the recent presidential race received some preferential treatment. That does not mean that anyone has proven anything, nor that the statistical analysis makes any sort of unassailable case. It merely raises a concern that, given the probabilities, Clinton donors appear to have survived the dealership closings surprisingly well.

This puzzled us. Why would there be an significant noticeable (we have rightly been called out for using significant here) and highly positive correlation between dealer survival and Clinton donors? Granted, that P-Value (0.125) isn’t enough to reject the null hypothesis at 95% confidence intervals (our null hypothesis being that the effect is due to random chance), but a 12.5% chance of a Type I error in rejecting a null hypothesis (false rejection of a true hypothesis) is at least eyebrow raising. Most statistians would not call this a “find” as 95% confidence intervals are the gold standard for this sort of work. Nevertheless, it seems clear that something is going on here. Specifically, the somewhat low probability that the Clinton data showing higher survivability of Clinton donors could result just from pure chance. But why not better significance with any of the other variables? Why this stand out?

Then we got to thinking. Steven Rattner, the Car Czar, is married to Maureen White, one-time national finance chairman of the Democratic National Committee. What does Maureen do now? From her website:

Maureen White is currently Chairman of the Board of Overseers of The International Rescue Committee (IRC), a member of the North American Advisory Board for the London School of Economics, and a National Finance Chair of the Hillary Clinton for President Campaign. (emphasis ours)

That website looks dated, but you get the idea.

Again, we want to point out that our findings are preliminary and subject to change. But whatever the result, the Administration has made themselves very vulnerable by taking charge of the dealership closing decisions.

I’m still not sure if there’s anything to the allegations, but there seems to be more than enough anomalies to warrant some questions being asked of the Obama administration. It should be noted that the theory regarding potential shenanigans has morphed from Obama creating a Republican hit list with the closings, to Obama benefiting Democrat donors by allowing their dealerships to survive (and thrive), to Obama’s “Car Czar” rewarding donors to his wife’s favorite political candidate (Hillary Clinton). When the theory moves that much, often it’s a sign that one is fishing for a villain. And despite the evidence amassed in this case showing that an unusual number of Democrat donors are set to prosper from the closing decisions, that may be the case here.

However this all turns out, one thing is certain: by involving itself so deeply in the fate of Chrysler (and GM), the Obama administration invited scrutiny concerning its decision-making processes. Furthermore, in being so opaque about how the government is picking winners and losers (not to mention that it is making these decisions at all), the Obama administration has left itself open to attacks of favoritism. That has nothing to do with Obama or partisanship in particular, but with the fact that unaccountable power rightfully raises fears and suspicions of favoritism. If Chrysler had been left to fend for itself in bankruptcy, none of these questions would have been raised.

The government arrogated to itself tremendous amounts of power over what would normally be private business decisions. In the process, the Obama administration blatantly used its power and influence to reward a favored constituent group (the UAW). Now that statistical evidence suggests more favoritism may have been in play, it’s a little late to cry “conspiracy theory.” Instead, the Obama administration should start opening the books and answering questions.

“Dealergate”: Things To Keep In Mind

Whether or not the decisions to close certain Chrysler dealerships was political motivated is still an open question, and based mostly on anecdotal evidence as well as an incomplete analysis data. Regardless, the evidence available thusfar, when viewed in light of the Obama administration’s previously demonstrated willingness to meddle for partisan gain (UAW anyone?), suggests that in the very least more investigation is warranted.

As the investigation unfolds (the yeoman’s work of which is being done by Doug Ross and Joey Smith), there are couple of things to keep in mind. Although many people have referred to the closing list of dealerships as a “hit list” it makes much more sense to concentrate on the dealerships remaining open and regarding it as a potential “friends Obama supports” list. By way of example, the evidence unearthed by Joey Smith regarding the RLJ-McLarty-Landers enterprise reveals that big time Democrat donors and partisans are reaping enormous benefits from the Chrysler plan in the form of all its competition being wiped out. So who owns this luckiest of dealerships?:

In my analysis of the Chrysler dealers that will remain open, I came across one dealer group that stood out to me.
The company is called RLJ-McLarty-Landers, and it operates six Chrysler dealerships throughout the South. All six dealerships are safe from closing.

[…]

The interesting part is who the three main owners of the company are. The owners are Steve Landers (long-time car dealer, 4th-generation dealer), Thomas “Mack” McLarty (former Chief of Staff for President Clinton), and Robert Johnson (founder of Black Entertainment Television and co-owner of the NBA’s Charlotte Bobcats). Landers has given money to Republicans in the past, but McLarty campaigned for Obama in 2008, and Johnson has given countless amounts of money to Democrats over the years.

Smith has found a similar fortune for Lithia Motors, whose CEO Sidney Deboer is a Democratic donor (although he’s also given to Republicans) and has come out publicly in favor of the Obama administration.

Of course, all of this is still anecdotal, but the planned closings look awfully fishy when the list of canceled dealerships is so totally dominated by Republican donors, and the list of survivors features prominent Democrat supporters.

Regardless of the above, Nate Silver has provided the excuse for Obama supporters to safely ignore this story by declaring the percentage of Republican car dealers to be so high in comparison to Democrats, that there should be little to no surprise when the closing list is so chock full of GOP partisans:

There is just one problem with this theory. Nobody has bothered to look up data for the control group: the list of dealerships which aren’t being closed. It turns out that all car dealers are, in fact, overwhelmingly more likely to donate to Republicans than to Democrats — not just those who are having their doors closed.

[…]

Overall, 88 percent of the contributions from car dealers went to Republican candidates and just 12 percent to Democratic candidates. By comparison, the list of dealers on Doug Ross’s list (which I haven’t vetted, but I assume is fine) gave 92 percent of their money to Republicans — not really a significant difference.

There’s no conspiracy here, folks — just some bad math.

Despite what Silver asserts (i.e. that the control group of non-closing dealerships should be examined), he does no such thing. Instead, he researches the Huffington Post’s Fundrace database for donations from car dealers to arrive at his decision that such occupation gives to the GOP at the tune of 8-1. However, Open Secrets arrives at a much different conclusion, especially over the long term, in which dealers only gave to the GOP at approximately a 3.5-1 clip. At those numbers, one would expect to find somewhere around a quarter of the closings to affect Democrat donors, instead of the 2.36% found thus far:

In fact, I have thus far found only a single Obama donor ($200 from Jeffrey Hunter of Waco, Texas) on the closing list.

Another review of all 789 closing dealerships, by WND, found $450,000 donated to GOP presidential candidates; $7,970 to Sen. Hillary Clinton; $2,200 to John Edwards and $450 to Barack Obama.

Of course, it’s important to remember that statistics do not prove the existence of anything, just its likelihood of existing. Nevertheless, the details uncovered so far suggest that partisanship may have indeed played a role in deciding which franchises remained open.