Auto Loans Didn't Work--> NOW WHAT??

Many of US screamed bloody murder when Congress gave loans to the Detroit auto business. After all there are so many things wrong with the Detroit Auto industry, weak product offerings, oppressive Union Contracts, to many dealers just to name a few. Can throwing an extra $17 Billion at them save the industry? The answer was a resounding NO.

This week General Motors and Chrysler, the companies that took the federal money were supposed to come to congress with a business plan to take them to solvency.  The UAW  is fighting GM tooth and nail--even in the worst of times they do not believe our government will allow the Detroit Auto Industry go Chapter 11. But now they might very well have to, so how do we get out 17 Billion Back? Thanks to an abdication fiduciary responsibilities, by Congress that is not very likely:

GROSSMAN: $17 billion auto blunder
Andrew Grossman


The first thing to do when you've lost $17 billion is to hire lawyers. Expensive lawyers.

That's what the federal government just did. Even the name of the firm it hired, “Cadwalader, Wickersham & Taft LLP,” sounds expensive. But all the lawyers in the world won't help the feds recover the $17 billion it lent to General Motors and Chrysler less than two months ago.

The problem is simple: Lending money to a failing business is risky. That's why the automakers had to go to the government in the first place - no one else would lend them a dime. The best solution? Don't do it!

But instead of following that common-sense advice, the government tried to be clever. It lent the money, but with conditions that it said would protect taxpayers from a loss.

The main condition, stated clearly in the loan agreements in legal-sounding language, was that the automakers really, really had to repay the government, no matter what. Even if other loans came due first, they had to pay back the government ahead of them. Even in bankruptcy.

In legal terms, the government tried to claim “priority” over all those who previously lent GM and Chrysler money and asserted that its loans would be transformed into super-safe “debtor-in-possession” loans if either company declared bankruptcy.

Unfortunately, those payback guarantees are as meaningful as a politician's campaign promises - aspirational, at best, and completely unenforceable. That, again, is why sane people - who prefer not to get stiffed - don't lend to businesses on the verge of bankruptcy, no matter what promises they get in return.

So now the government is paying top-flight attorneys hundreds of dollars an hour to figure out how to get the money back. Good luck. One bankruptcy law expert I spoke with frankly calls the situation hopeless.

It certainly seems that way. GM and Chrysler were in bad shape back in December - on the brink of collapse, their CEOs told Congress - when the government loans came through, and things have only gone downhill since. Chrysler's sales plunged 31 percent in January, and it's now selling fewer than half as many cars each month as it did last year. GM's numbers are about the same.

And despite the government money, neither has made much progress restructuring its operations. Both shuttered plants for a month over the holidays due to weak demand but have been less successful winning serious concessions from labor, like scrapping the phone-book-thick work rules that crush flexibility and efficiency. There has been even less interest in concessions from lenders and dealers. The problem is that no one wants to be the first to give in, especially when more taxpayer dollars could bail out everyone's troubles.

More? Yes, that's right. Even with the first $17 billion down the drain, GM and Chrysler are gearing up to ask for a new round of financing, likely tens of billions. They promise to present “turnaround plans” - the second set in three months - to the government later this month and are counting on additional funds no later than March. At that point, they're out of money, for real.

But throwing good money after bad would just delay the inevitable: These companies are headed into bankruptcy. And once they're in bankruptcy, those government loans are formally wiped out.

Bankruptcy may actually be a liberating tonic. Rather than wait and hope for concessions, the automakers could propose what they need and let the bankruptcy court make it so. In one fell swoop, that takes care of massive debts, unwieldy labor agreements, bloated dealership networks, and a variety of other problems. In a year or two, they would emerge, smaller but revitalized and finally profitable - something not even on the horizon at present. But that will never happen while another bailout remains on the table.

So for the sake of taxpayers, who are already down $17 billion, and the automakers themselves, Barack Obama needs to announce a break with Bush administration policy: no more phony “loans” to businesses with no hope of repaying. Specifically, that means no more money for GM or Chrysler. Tell them to lay off their lobbyists - that'll save them some money - and go back to Detroit and get to work on their businesses. That's the only chance they have.

That's the way to protect taxpayers from further losses, too. The only losers will be the expensive attorneys, whose services won't be needed.

Andrew M. Grossman is senior legal policy analyst in the Center for Legal and Judicial Studies at the Heritage Foundation (heritage.org).