Behind the White House's Take on the Auto Bailouts

There are some timeless truths to the government's auto bailouts:

That the government is not bigger than the business cycle.

The market picks winners based on economics, the government picks winners based on politics.

And every time history repeats itself, the price goes up. U.S. taxpayers will likely lose money on the auto bailouts, the White House finally acknowledges.

However, the president in a speech at a Chrysler plant in Toledo, Ohio on Friday touted the auto bailouts as a victory, because it saved one million U.S. jobs." On a day when the government reported dismal jobs numbers showing just 54,000 jobs added in May, and an unemployment rate that crept up to 9.1%, the president said: "All three American auto makers are now adding shifts and creating jobs at the strongest rate since the 1990s."

But where? General Motors, which got an estimated $50 billion in bailout help, says that almost half of its cars will be made in labor markets overseas, where pay comes in at less than $15 an hour. Some two-thirds of GMs sales are projected to come from outside America.

However, the new chairman of the Democratic National Committee, Democrat Rep. Debbie Wasserman Schultz of Florida, chided Republicans in late May:If it were up to the candidates for president on the Republican side, we would be driving foreign cars. They would have let the auto industry in America go down the tubes."

But Michael O'Brien of The Hill newspaper says that Florida motor vehicle records indicate that Wasserman Schultz owns a Japanese made car, a Nissan 2010 Infiniti FX35.

Reminds me of what satirist Will Rogers once said: There is no trick to being a humorist when  you have the whole government working for you."

The president in his speech Friday also made the claim that Chrysler repaid its bailout money.

However, Chrysler still owes U.S. taxpayers $2.3 billion, according to the Treasury Department. The government loaned Chrysler $10.6 billion. Some of the money went to the portion of the car maker known as old Chrysler that remained in bankruptcy, and is not expected to be repaid. Chryslers biggest stake now belongs to Italian automaker Fiat.

Even the White House auto czar says that the auto bailouts could cost taxpayers $14 billion, after initially stating they would cost $16 billion.

American taxpayers would be out $10 billion if the U.S. government cashed out its stake now in GM, adds the auto czar. GM is still trading below its break-even share price and is seeing sales slump.

Weve been here before with the auto makers. Chrysler was bailed out with $1.2 billion loan guarantees back in 1979 to 1980. Back then the government forced creditors to take a hair cut down to 30 cents on the dollarjust as the government did so in the recent auto bailouts. History repeats itself.

Knowing that, what creditor or bond investor in their right mind would lend to them now?

Both Chrysler and General Motors were highly-dysfunctional car companies with lots of debt on the balance sheet and with much owed to union retiree plans. That debt pushed them into insolvency. Remember, General Motors lost more than $10 billion at the height of the bubble in 2005, when everyone else was making money. It too let its finance arm, GMAC, wade deep into subprime loans via Residential Capital unit. It bought a subprime auto lender, AmeriCredit, in July 2010 to continue getting borrowers on the margins to buy.

The problem is this. Carmakers can make 95 million cars a year, says IHS automotive, but only about 70 million cars and light trucks will be sold this year. Thats a classic supply and demand problem that has bedeviled the industry since day one.

Would bankruptcy have been better, instead of $80 billion chucked at the auto companies to appease union workers, who vote Democratic?

"We've got to rebuild this whole economy for a new age," the president said in his speech. Really? D.C. can commandeer and stage manage the U.S. economy? Haven't the experiences with the insolvent Fannie Mae, Freddie Mac, the U.S. Post Office and the troubled Amtrak told us otherwise?

Havent the airlines time and again restructured through bankruptcy, and havent U.S. jobs endured in that sector?

Former chief executive of Eastern Airlines, Frank Borman, once said: Capitalism without bankruptcy is like religion without hell. It doesnt work.