Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

April 23, 2009

Treasury Prepares for Chrysler Bankruptcy Filing

This evening, the Treasury is reported to be preparing for a Chrysler bankruptcy filing.

The Treasury plan reportedly preempts the bankruptcy judge by guaranteeing worker pensions and retiree health care benefits. If so, either the taxpayer will be on the hook for billions of dollars--either subsidizing pensions and health care for retirees under 65 beyond benefits other Americans could never dream of having--or the entity that emerges from bankruptcy will be crippled and require continuous government subsidies.

Similarly, this sets a dangerous precedent for General Motors and Ford.

The UAW shares with management principal responsibility for the failure of Chrysler, and Treasury Secretary Timothy Geithner and the Obama auto task force demonstrate little understanding of the competitive dynamics of the industry by agreeing to these terms.

Repeatedly, the Obama administration has favored its political supporters by interfering in the marketplace and now it extends that to judicial processes with a dangerous and politically jaundiced decision.

Obama's favoritism toward the union in these negotiations is a clear example of political expediency imposing grave economic costs. Specifically, Chapter 11 makes the potential deal with Fiat to provide small car designs to be built in Chrysler factories much less likely. Hence, the company that emerges from Chapter 11 will be much smaller than the one that would have emerged through the task force's mediation, because the company that emerges from bankruptcy may not have small cars to make at a time when the market wants them. More of Chrysler's car assembly plants will be permanently shuttered.

This outcome was precipitated by the Obama Administration's failure to deal firmly with the union. In the end, retiree benefits may have been protected but only at the cost of greater job losses among current autoworkers. 

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.