Obama Spot On with GM, Chrysler Bailout

Many people are bewailing the apparent difference in treatment between failing Wall St. companies and failing US auto companies.  Democrats and Republicans both are taking President Obama to task for these differences, suggesting that he secretly is in bed with the high finance crowd and, like seemingly everyone else inside the DC Beltway, secretly opposed to good old American blue collar workers.

These accusations are unfounded. Here is why:

1. With the banks the government can act through the Federal Reserve and/or the FDIC in order to create a de facto condition of receivership without resorting to de jure bankruptcy. As we have seen, these can be an extraordinarily flexible mechanisms — credit windows, discount windows, transfer of assets on and off the Fed balance sheet, preferred stock purchases, and so forth. None of these options likely would be available to a bankruptcy judge under standard bankruptcy code. Naturally, then, we see markedly different behavior toward the banks than we do toward other industries.
2. With the auto companies, no such intermediary organizations exist. Earlier bailout funds, it is true, were funnelled from the Fed to the finance arms of the auto companies (e.g., GMAC), and thence to their umbrella organizations. This was a fudgy conduit at best all along, and in the context of repeat and/or continual “bailout” probably is extra-legal on its face.  Still, I have no doubt that the same path would have been in play had the day-forward recovery plans from GM and Chrysler been deemed viable by the administration.  They were not.  Since the auto companies have made it clear that they will not declare a formal bankruptcy, the administration has no viable mechanisms left to them but to force a condition of bankruptcy — making operating and warranty funds available in the short term, dictating a series of reorganization hurdles and timeframes, and ousting existing leadership.  All of these things likely would have happened under a court-administered bankruptcy.  Anything more than this, no matter how much we might faunch and moan, probably are extra-legal and perhaps extra-constitutional.
3. “Structured bankruptcy” under existing bankruptcy code is the negative end point to the administration policy. The positive end point is profitable restructuring (GM) and profitable merger (Chrysler).  Any other end points would require the Executive Branch to take on the burden of administering a de facto bankruptcy proceeding, a task by law reserved to the Judicial Branch. Today’s actions by the administration move very close to that territory (Wagoner’s resignation, the assumption of warranty costs by the government, and the 30/60 day timelines all are data points suggesting a bankruptcy proceeding rather than a standard corporate or labor negotiation). But the administration was explicit that the “…best chance at success may well require utilizing the bankruptcy code in a quick and surgical way.” In other words, per existing constitutional and bankruptcy law the established Judiciary will have final authority of the automotive business, just as it does for all other non-finance businesses.
4. The only way around this, as I see it, would be for Congress to authorize a sort of “Automotive Federal Reserve” that legally could step in at times like this. This is not likely. Obama could pull a page from the Truman/Reagan playbook and nationalize the auto industry under inherent war powers (largely repudiated in Youngstown Sheet and Tube v. Sawyer) or Taft-Hartley (explicitly designed for labor disputes). Again, neither are at all likely and both probably are extra-legal.

If President Obama were to intervene as people are breathlessly demanding, those same people subsequently would have to impeach him for radically overstepping the constitutional powers of his office.