With unusual candor, as reported last August, Senator Bernie Sanders of Vermont, a socialist, commented about the first-ever audit of the U.S. Federal Reserve Bank and the total $16 trillion in secret bank bailouts.

“This is a clear case of socialism for the rich and rugged; you’re-on-your-own individualism for everyone else. No agency of the U.S. government should be allowed to bail out a bank or corporation without the direct approval of Congress...”

This got me thinking about bailouts of “green businesses” like Solyndra, Evergreen, Spectrawatt and Ener1 and what was learned from the auto-industry bailouts, a topic close to many readers. A review of recent bailout history is of great value and quite instructive.

In December 2008, President Bush agreed to auto-industry pleas for federal loans. He directed $17.4 billion of the $700 billion in Troubled Asset Relief Program (TARP) funds, which were allocated specifically for loans to financial institutions, be redirected to General Motors and Chrysler. Ford decided to clean up its own mess without federal money. Within two months, President Obama spent an additional $7.5 billion of TARP money on the same two companies. GM and Chrysler – plagued by incompetent management and inefficiencies wrought by excessive labor-union contracts, unfunded retiree pension and health-care costs, falling market share and sales – refused considering the usual course of bankruptcy. (GM lost $40 billion in 2007, and sales declined 45% in 2008, while Chrysler market share fell 30% that year.)

By March 2009, the new Obama Administration had forced management changes at GM, ordered Chrysler to merge with Fiat, diverted $77 billion in TARP money to the two firms and then directed both firms to enter bankruptcy. By summer 2009, GM had shed a third of its U.S. workforce and was jointly owned by U.S. government (60%), the UAW union (17%) and Canadian government (12%). Chrysler was owned by the UAW (55%), Fiat (20%), and the U.S. (8%) and Canadian (2%) governments.

It is interesting to note the various facts-and-figures set forth by analysts of this 2008-09 industry crisis. The Big-Three manufacturers, parts suppliers and car dealers employed 1.6 million people. Auto-related aftermarket service businesses employed 3.1 million in this country. Bureau of Labor Statistics data for 2008 showed 504,000 were employed in auto-parts manufacturing, 864,000 in repair, 340,000 in wholesale, 1.2 million in dealer operations and 114,000 in manufacturing. Many people (2 million) relied on the auto industry for health insurance, and 775,000 retirees collected auto-industry pensions.

GM directly employed 123,000 in North America. The hourly wage at a Big-Three (union) plant averaged $28, but the “total compensation” for a GM worker was $73. Meanwhile, the non-union Toyota worker received $48. Average annual wages for production workers at the Big Three was $67,480 and $81,940 for skilled workers. For each active worker at GM in 2008 there were 3.8 retired dependents; at Chrysler there were 2; and at Ford there were 1.6. The UAW insists that labor costs represented only 8.4%  of total cost of manufacture and sale of cars. (Sure. Do you want to buy a bridge?)

An under-reported part of this debacle is that “deficiency claims” during Chapter 11 cases were not allowed. The bottom line is that government pushed through a bankruptcy sale that denied GM and Chrysler creditors their rights and forced reorganization disguised as a sale. Chrysler secured-bond creditors were forced to accept 29% of their loans, while the UAW accepted 40% as an unsecured creditor. What our analysis shows is that, by spending TARP funds to bail out the auto industry and by coercing settlements that denied lawful process and protocols, what the government did was illegal.

The events described here are a travesty because of potential impacts on U.S. industry’s future. It is without question that these described activities were reprehensible violations of Constitutional government.

It is counter to national interests that these events happened. A lesson learned is that federal intervention in business affairs fosters corruption. Deviation from bankruptcy laws stole public money for the benefit of union equity ownership and was an obvious political maneuver. In the cases of the green company bailouts with taxpayer money, there is no legal authority for the payments and there were political contributions in a veiled quid-pro-quo. State capitalism is a controlled stasis on a free economy and cannot be justified. Government cannot legally and should not pick winners and losers and manipulate practices by which industry functions. Corruption always occurs when government bolsters one industry or penalizes others or stimulates one type of economic activity versus another.

When politicians pick winners and losers, a corrupt government is unavoidable. IH