Skeel on Bankruptcy and the Auto Industry Bailout

On EconTalk today David Skeel of the University of Pennsylvania Law School talks about bankruptcy and the government bailout of the auto industry. This podcast is one that everyone needs to listen to as Professor Skeel explains all the costs associated with this bankruptcy, the lack of transparency in the process and the corners that were cut that jeopardize the rule of law going forward.


On the costs of the bailouts professor Skeel states "Well, if you start with the metric that the government wants to use, and that people often use--to what extent are taxpayers on the hook for this, what are they going to end up paying--what you would say is that it now looks like the car bailouts will cost about $14 billion. They'll be somewhere in the range of $14 billion; those numbers may change, but that will not end up getting repaid even after all the government's GM and Chrysler stock is sold; etc. To that, if you are trying to get an accurate number, you would need to add the other cost to taxpayers of the bailouts, that don't factor in the direct loans by the government. And the cost I have focused on in my work is that the Treasury basically adjusted the tax roles to give GM a special break with respect to its taxes. That is a break that could be worth as much as $45 billion in tax write-offs. When you run that through the 28% corporate-level tax it's probably in the $12 or $13 billion range. So basically what happened is, GM had a lot of tax losses, that, depending on how the transaction was structured might disappear, and depending on whether the government held onto its stock or sold its stock. Treasury essentially said: Don't worry about what you do; we are going to let you have these tax write-offs. Which ends up saving GM about $12 or $13 billion. So, you need to be taking into account those kinds of things as well--things that the government did that took money from the taxpayers, and essentially gave it to GM or Chrysler, even though it wasn't a direct loan; it was a regulatory intervention."


He goes on to note what this process does to traditional bankruptcy and its effect on the economic climate.  "I really think as well that that feeds into the general impression that Wall Street has been bailed out, is being bailed out, and the little guy really isn't being helped. That's been an impression throughout the crisis, and I really think there's something to it. When you start suggesting that the rules apply differently for different people, I think it really erodes the economic morality, and erodes it in a way that really has affects everywhere. I think it's just terrible, that kind of behavior, and there has been a lot of it during the crisis."


The costs to these bailouts and government bankruptcy procedures will have large costs to taxpayers for years to come both monetarily and non-monetarily.