The Monitor's View

Obama's socialized bankruptcy for GM

His plan prevents even greater layoffs in a recession. But once the economy recovers, GM must be let loose from federal strings.

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America's recession might have been longer and the job cuts steeper if General Motors and Chrysler had been thrown into a normal bankruptcy. Under that route, a judge would have salvaged only the most market-worthy parts of the carmakers and liquidated the noncompetitive parts.

Instead, President Obama chose a different course – prenegotiated bankruptcies – to reorganize each company. He decided to used his clout to force only certain concessions from stakeholders. And he decided to cater to political interests, such as demands in Congress not to allow GM to import its own cars made in China.

As a result, his socialized bankruptcy left taxpayers as majority owner of GM and with many aspects of "old GM" intact. And Mr. Obama virtually gave Chrysler to Italian carmaker Fiat in return for a promise that it make small cars in the US.

For now, at least, Mr. Obama's trade-offs in the negotiations have kept the economy from getting worse. He bought time until the economy recovers to test if a slimmed-down GM and Chrysler can ultimately survive. And for workers who will keep their jobs in the companies or related parts-suppliers, he has given them time to prepare for alternative types of work.

Achieving those immediate goals is all to the well. But Obama was not as rigorous in applying market principles on all the players as a bankruptcy judge might have been. And that could result in costs and political dilemmas down the road, especially in the case of GM.

At least three important questions hang over the Obama strategy:

Why didn't he change GM's top management – and its staid culture – even more drastically so that it doesn't make mistakes similar to those of the past? Is GM's big-vehicle culture now able to make competitive small cars, as Obama insists as part of his goals?

Why didn't the president insist that the United Auto Workers union accept steeper cuts in pensions, wages, and healthcare? While the UAW's concessions will be painful for many of its members, they do not give GM the low labor costs to be competitive with foreign carmakers in the low end of the US domestic market, where GM will need to sell.

And while Obama plans to shield GM from further federal intervention through a trust for government shares, is he ready to prevent Congress from meddling in GM's future? During the election years of 2010 and 2012, Midwest legislators will not want to be hands-off if GM falters.

After putting $50 billion into GM, taxpayers and their elected representatives may find it easier to keep GM alive as long as possible in hopes of someday getting their money back. For now, GM has been able to avoid its final day of reckoning because of the recession.

But once the economy is back on its feet, GM and its unions must be allowed to drive on their own, either at a competitive speed or to the junk yard.

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