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The Federal Elephant in the Chrysler Bankruptcy Courtroom

Posted By James Gattuso On April 30, 2009 @ 1:33 pm In Ongoing Priorities | Comments Disabled

U.S. President Barack Obama discusses the plans for Chrysler to file for Chapter 11 bankruptcy in the Grand Foyer of the White House in Washington on April 30, 2009. Behind Obama are members of his auto task force.

Chrysler is declaring bankruptcy. The step that was once declared “off the table” is now a reality. And that’s good news. The bankruptcy process [1] provides the long-troubled automaker with the means necessary to reduce restructure itself into a viable enterprise.

It’s also good news that Chrysler will have private-sector help in this task, in the form of an alliance with Fiat, which is expected to not only provide technological aid for Chrysler, but take a leading operational role – up to and including selection of a new CEO. The move makes sense. Fiat, which had its own near-death experience [2] a few years ago, knows a thing or two about reviving a moribund firm. And the combination – though less than a full merger – would create for operational purposes the fifth-largest [3]automaker globally, providing the scale necessary to survive on the global stage.

But there is an elephant in the bankruptcy courtroom [4] that can’t be ignored: the dominant role of the federal government in the process. Tellingly, the announcement of bankruptcy was not made from Detroit, or from a federal courthouse somewhere – it was made from the White House, by President Obama himself. That left no doubt as to who is in the driver’s seat.

The federal role is most obviously felt in direct subsidies. Some $4 billion in loans have already been extended, and as much as $12 billion [5] more is now expected to flow in the wake of today’s deal. But that may just be the front bumper of taxpayer support. The President went out of his way, for instance, to thank the major banks who agreed to accept deep reductions in the debt owed to them by Chrysler. Notably, most of these banks are also major recipients of banking bailout funds, and are themselves part-owned by the government.

Taxpayers shouldn’t hold their breath waiting to get this money back. But the damage may go well beyond that. President Obama – not to mention Congress – has hardly been shy about exercising the leverage taxpayer funding gives him. Just ask Rick Wagoner [6], the former CEO of General Motors. This control is already being manifested in pressure to make favored fuel-efficient, small cars. Expect more helpful “advice” to come.

The President does deserve some credit at least for not playing the protectionist card here. Despite some bluster about preserving an American car companies, he embraced a role for Fiat, recognizing the international character of the modern auto industry.

The real worry isn’t Italian cars coming to the U.S. as a result of this deal, but the prospect of Italian-style capitalism, with its tradition of heavy state involvement in industry. Next time he meets with the folks from Italy, the president might want to ask how well that worked out.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/04/30/the-federal-elephant-in-the-chrysler-bankruptcy-courtroom/

URLs in this post:

[1] The bankruptcy process: http://www.heritage.org/research/economy/lm33.cfm

[2] near-death experience: http://www.economist.com/displayStory.cfm?story_id=11090197&source=login_payBarrier

[3] fifth-largest : http://uk.reuters.com/article/topNews/idUKTRE53T57520090430

[4] elephant in the bankruptcy courtroom: http://latimesblogs.latimes.com/money_co/2009/04/general-motors-corps-latest-debt-for-equity-swap-proposal-is-barely-out-of-the-box-and-critics-already-have-declared-it-a.html

[5] $12 billion: http://online.wsj.com/article/BT-CO-20090430-715740.html

[6] Rick Wagoner: http://www.foundry.org/2009/03/30/youre-fired-obama-fires-gms-ceo/

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