Bailout Nation (9 page)

H
ad Chrysler gone belly-up, the loss of 123,000 jobs at Chrysler would've scared that the bejesus out of the United Auto Workers (UAW). The union had grown powerful and influential over time, and had developed a ruinous us-versus-them mentality with the management of the Big Three. A massive loss of jobs would have served notice that the current state of business was simply unsustainable and could not continue without major repercussions in the future.

One can imagine that in the face of such tragic economic destruction, the UAW might have begun negotiations with a completely different set of objectives. The UAW's senior management should have been tossed out, and a new operating arrangement negotiated.

Indeed, one can even imagine a more enlightened set of union representatives who would have been willing to horse-trade much more than they did, giving up pension and health care benefits, in exchange for a significant stake in the companies their union members worked for. Perhaps a more “Silicon Valley stock option” approach might have been the way to go. Employees could give up some health care benefits and pension guarantees, and receive in exchange equity in the form of stock options. I would imagine that this ownership arrangement would have worked miracles on worker productivity, too.

This would have left the remaining Big Two in a much healthier financial condition going forward.

The bailout sure didn't do the auto workers' union any long-term favors. The UAW's membership peaked in 1979, with some 1.5 million members. Twenty-seven years later, UAW membership had fallen by two-thirds to 538,448 (2006). And year-over-year totals are still falling by significant amounts. In the last full year of data we have (2006-2007) the union lost another 73,538—a 14 percent annual membership decrease. Membership is now below half a million, and rapidly heading toward 400,000.

Perhaps that's not such a coincidence, given what we know about the other implications of this bailout.

I
n the event of a Chapter 7 bankruptcy, we don't know that Chrysler would have disappeared from the face of the Earth. Unlike us mortals, large corporate entities, with valuable physical assets and intellectual property, stand a very real chance of some form of reincarnation. Chrysler owns valuable manufacturing facilities, trademarks, patents, and designs, along with three-quarters of a century of manufacturing know-how. At pennies on the dollar, these assets would have been attractive to a third-party purchaser.

Had Chrysler been allowed to slip the surly bonds of Earth in 1980, it's not too difficult to imagine a vulture investor obtaining all of the aforementioned assets, and putting them to good use. Maybe it would have been a group of wealthy auto enthusiasts, or perhaps the budding Korean manufacturers. Whoever it might be, just picture the newly refurbished Chrysler Corporation recapitalized, minus the onerous labor contracts, pension obligations, and health care overhead. Its new owner would have been free to pursue new manufacturing methods, new automobile designs, even new markets—with all the advantages Chrysler itself had, but without the defunct company's baggage.

A postbankruptcy Chrysler would have been leaner, meaner, and more cost-efficient, and maybe even a more fuel-efficient machine than the rest of Detroit. Surely it could have been willing to take chances on some new designs that would break free of the stodgy old boring boxes put out by Detroit in the 1970s and 1980s.

Not only would Chrysler have been much more competitive in the U.S. and world markets, its mere existence would have forced GM and Ford to streamline their own processes and improve their vehicles in terms of attractiveness, mechanical reliability, and fuel efficiency.

I
t is quite reasonable to conclude that the bailout of Chrysler in 1980 prevented significant market forces from doing their best to reboot the entire U.S. auto sector.

The short-term gains of the bailout to save some jobs in the auto industry ended up costing a million more jobs over the ensuing decades.

Avoiding some immediate pain now seems to invariably lead to much greater pain down the road. This is a pattern we see repeated over and over again.

As we progressed deeper into the history of bailouts, comparing them to the present, it became increasingly obvious that just about all American bailouts follow a consistent blueprint. This consistency was remarkable from event to event, regardless of the underlying corporate sector, the amount of money involved, or even the decade in which the bailout took place.

What does the prototypical bailout look like? Something like this:

1.
Risk event:
Typically of the company's own making, it might be something as general as leverage or as specific as collateralized mortgage-backed securities. Regardless of the particular causes or complexities of these risk events, rest assured that a very significant amount of money is at risk. It is not only the company, but a series of related investments that are also endangered. This means monied parties—usually well connected on Wall Street and in Washington, D.C.—have a vested interest in not allowing the natural course of events to occur.

2.
Preawareness:
At first, the risk event is known to only a small coterie of experts such as junior researchers who are easily dismissed, and academics, easily derided as nonpractitioner theorists. The early observers during the precrisis write papers, attend conferences, and discuss industry specifics. More recently, they swapped e-mails and linked to blog posts.

3.
First reactions:
Key employees and industry insiders know something is amiss. But they continue to put on a happy public persona. Those pointing to the warning signs are denigrated with increasingly hostile rhetoric as the entrenched interests hope to scare or shame them into silence.

4.
Bigger reactions:
The risk event continues to grow in magnitude. It slowly leaks to the press—industry-specific journals at first, then general-interest media. By that point, it is very slowly beginning to seep into the public's consciousness. This is a process that typically occurs over months and indeed years.

5.
“Interested party” agitation:
A group of self-interested parties have taken notice of the situation. Corporate management starts to become increasingly concerned—mostly with their own self-preservation, but with health of the corporate entity as well. There may be a subset of fund managers who perceive the situation as either threat or opportunity, and they seek to protect their assets from damage—or profit from some entities' demise.

6.
Official concern:
By now, some elements of the risk event have impacted the company's stock price. It is widely perceived as a temporary circumstance—and an opportunity to “buy while the shares are on sale.”

7.
Broader worry, deepening panic:
The public's prior hazy understanding is coming into sharper focus: Some company or industry is less than healthy.

8.
Major intervention/bailout:
The political class eventually finds itself unable to resist temptation, and answers the call of some constituency or political campaign donor. We begin to hear phrases like “systemic risk” or “economic catastrophe.” There is a tremendous incentive to overly dramatize the risk event, so as to improve the likelihood of some form of legislation passing.

9.
Rationalizations and apologies:
In a manner bereft of contrition, officials explain why this was absolutely necessary. They warn of the horrors that would have befallen us all if the bailout hadn't been enacted in haste. Congressional hearings are held, often with the same executives who lobbied for the bailout testifying before the very same members of Congress who approved the package.