Chrysler in Chapter 11: Better for taxpayers

Obama has had to learn not to do political favors in business.

Polls show Americans prefer bankruptcy over a bailout for troubled US car companies and President Obama has now partially and reluctantly accepted.

He has let Chrysler file for Chapter 11 and soon may be forced to let General Motors do the same. In both cases, Mr. Obama is learning why government should not necessarily impose political concerns on what should be a business or legal decision.

His attempt to avoid a Chrysler bankruptcy failed Wednesday because his proposal favored the United Auto Workers over the company's small investors, such as teachers' pension funds. The UAW, while it has made sacrifices in wages and benefits, would have been given more than half ownership of the firm – a far larger share than it deserves under Chapter 11.

Now a bankruptcy judge will be able to treat all stakeholders more fairly, as the law requires, without favoring the politically powerful, such as the UAW.

But the judge will also be presented with a plan to save Chrysler by giving Fiat, the Italian car company, a 20 percent share, with the government holding 8 percent. But Obama wants Fiat to guarantee that it will sell more fuel-efficient vehicles in the US than Chrysler has – or be denied a higher share. With a post-bankruptcy Fiat-Chrysler company likely struggling to find customers, this may be an onerous requirement.

Obama rightly says he doesn't want car companies to become "wards of the state," but his demands may only prolong the necessity for taxpayers to keep spending billions in trying to fix the automakers.

If, indeed, the UAW somehow ends up owning a majority share of Chrysler, the union rank-and-file may end not being happy with the inherent conflicts of workers as owners. When United Airlines' unions were given control over their airline in 1994, the arrangement did well when the industry was healthy but has hit big turbulence in the last few years.

To help GM avoid bankruptcy before a June 1 deadline, Obama is again facing a standoff between the UAW and the small bondholders. But with a promise to help the Midwest avoid further layoffs in the car industry, Obama will again try to make a deal that defies all the rules of fairness under US bankruptcy laws. In that proposed deal, the UAW would get 39 percent ownership.

Not everything the White House is doing for GM is onerous. Even as it proposes owning half of the company, it also acknowledged that an electric car (the "Volt") will cost far too much to be introduced in 2010 as planned.

Obama's most important goal – keeping a domestic car industry – would be more easily achieved by not imposing other social goals at this time of stress. The sooner GM and Chrysler face the cleansing process of bankruptcy, the sooner they can rise as industry competitors.

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