February 17, 2009
By Andrew M. Grossman
The first thing to do when you've lost $17 billion is to hire
That's what the federal government just did. Even the name of
the firm it hired, "Cadwalader, Wickersham & Taft LLP," sounds
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
The problem is simple: Lending money to a failing business is
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 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
Unfortunately, those payback guarantees are as meaningful as a
politician's campaign promises. Aspirational, at best -- and
Which, again, is why sane people -- 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
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.
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's 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
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
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
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 that isn't even on the horizon at
But that will never happen while another bailout remains on the
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've got.
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.
Grossman is Senior Legal Policy Analyst in the Center for
Legal and Judicial Studies at The Heritage Foundation.
First appeared in the St. Paul Pioneer-Press
The first thing to do when you've lost $17 billion is to hire lawyers. Expensive lawyers.
Andrew M. Grossman
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