Administration Fights to Preserve Dealership Closings
(cc photo by dave7)
The Obama administration is trying to remind members of congress that they shouldn’t wreck the auto bailout by all trying to save their district’s favorite car dealer:
The leader of President Obama’s automotive task force warned members of Congress on Tuesday that reversing or stopping the closing of thousands of General Motors and Chrysler dealerships could threaten the automakers’ turnarounds and keep them from repaying billions in government loans.
The official, Ron Bloom, also said the government no longer needed to guarantee the warranties on G.M. and Chrysler vehicles, now that the companies had emerged from bankruptcy protection. Mr. Bloom said the $641 million given to the guarantee program had been repaid, with interest. No claims were made under the program.
I’ve been extremely skeptical of this auto bailout initiative from the get-go. But things have actually turned out, thus far, much better than I would have expected. The bankruptcy process went relatively smoothly, and in the scheme of things the volume of net government expenditures has been pretty restrained. But congress stepping in and preventing the dealership closings would throw all of that into jeopardy.
26 Responses to “Administration Fights to Preserve Dealership Closings”
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July 22nd, 2009 at 2:37 pm
Dear Congress,
F-22 bitches!
Don’t screw with me.
Sincerely,
President Obama
July 22nd, 2009 at 2:46 pm
Shocking, Matt Y was skeptical of baillouts for people who don’t live in Washington DC or Manhattan, but is all for shoveling the cash to goldman sachs!
July 22nd, 2009 at 2:49 pm
Notice that Congress has every incentive to act the way it does. It illustrates the disadvantages of acting unilaterally and secretively the way the Obama Administration handled this case.
If GM craters, and fails to repay its loans, the blame will be placed squarely on Obama’s shoulders, not Congress’. He did not go to them to request funding or authorization for the bankruptcy proceeding, and instead used the tangentially related TARP legislation to execute his moves. For better or worse, Obama owns the GM reconstitution plan in the public eye; Congress knows this, and plans accordingly. So you see, while the micro-benefits of subsidizing unsustainable dealers will accrue to the Congresspersons, once things go awry, they will then off-load the national furor and debate it will raise onto their patsy, the Obama Administration – in essence, he becomes the only actor paying the costs.
July 22nd, 2009 at 2:57 pm
3: Actually, this is just the behavior of an unorganized Congress. None of them stand to lose anything if the closings move ahead as expected. But each one of them is hearing from major donors about how they need to stop this. On the whole though, nobody’s funding levels will be changed on a relative basis. Ultimately, Dems do stand to lose if Obama takes the hit politically, even if they are in Congress.
July 22nd, 2009 at 3:15 pm
The Brian Lehrer fellow on wnyc had a story about how GM is using bankruptcy as a pretext to renege on contractual obligations to owners of closing dealerships (saddling them with big inventory and debt burdens).
July 22nd, 2009 at 3:22 pm
Naturally, none of the members of Congress pushing this idiocy have the huevos to point out that – one way or the other – these dealers aren’t going to be selling Chryslers or Chevys. So, they can either go out on their own, or they can drag the rest of the US auto industry down with them.
However, I’m sure the dealers are in denial, and many members of Congress may not be smart enough to figure this out.
July 22nd, 2009 at 3:25 pm
I knew this was going to end up just like military bases and hardware. I wouldn’t be a bit surprised to see us end up with a “bi-partisan auto dealer commission” created to deal with this.
I can hardly wait for this level of efficiency and game playing to get into the entire health care and energy systems.
July 22nd, 2009 at 3:34 pm
But congress stepping in and preventing the dealership closings would throw all of that into jeopardy.
True, but that’s small potatoes compared to national healthcare. Maybe the prez can use this hideously bad-on-the-merits dealership idea as a bargaining chip for healthcare legislation. In fact, this is exactly the type of horse-trading that could get it done, because car-dealers and their employees (I would guess) punch above their weight in terms of votes. Also, a lot of them (again, I would guess) can be found in conservative or rural districts.
Shocking, Matt Y was skeptical of baillouts for people who don’t live in Washington DC or Manhattan, but is all for shoveling the cash to goldman sachs!
Point taken, but, although paleoliberals don’t want to hear this, the financial sector as a whole had the capacity — had it collapsed — to drag the entire economy down into Great Depression-like conditions. Nothing like this can be said of auto manufacturers or dealerships.
July 22nd, 2009 at 3:39 pm
That Donkey Benjamin,
What you’re saying makes sense on the surface, but this behavior by Congressmen doesn’t look any different from how they operate when it comes to transportation projects or the defense bill, and Congress writes every word of those.
July 22nd, 2009 at 3:40 pm
Just about the first thing anyone who knows anything about the domestic auto industry would have told you is that the domestic brands needed to dramatically reduce their dealer networks. Anyway, if necessary, this is what the veto is for. On one minor matter:
GM is using bankruptcy as a pretext to renege on contractual obligations to owners of closing dealerships (saddling them with big inventory and debt burdens).
I don’t know the details here, but in general that’s not a pretext, that is how bankruptcy works–you get out of a lot of contractual obligations.
July 22nd, 2009 at 3:44 pm
By the way, Goldman Sachs just bought back their TARP warrants. Between the warrants and the preferred dividends we got before Goldman paid back the TARP funds, the taxpayers made an annualized return of 23% on their TARP investment in Goldman. Not bad.
July 22nd, 2009 at 3:56 pm
What you need to understand Matt, is how dependent municipalities are on Auto-dealerships. They tax and license them to a huge amount to squeeze a lot of money from them (per car sold). A ton of auto-dealerships closing would really hurt cities in the pocketbook.
http://money.cnn.com/2009/06/02/news/economy/auto_sales_and_states/
July 22nd, 2009 at 4:08 pm
Dealerships today, dealerships tomorrow, dealerships to the far horizon.
July 22nd, 2009 at 4:13 pm
@DTM: AIG payout = $13 billion or so. TARP warrants at “full value” = $1.1 billion. Whoop-de-do.
July 22nd, 2009 at 4:18 pm
What you need to understand Matt, is how dependent municipalities are on Auto-dealerships. They tax and license them to a huge amount to squeeze a lot of money from them (per car sold). A ton of auto-dealerships closing would really hurt cities in the pocketbook.
But all that ultimately depends on the revenue from car sales, and past a certain point more dealerships isn’t selling substantially more cars, it is just redistributing around the same amount of sales to more points. In that sense, keeping a lot of car dealerships open unnecessarily isn’t really increasing the size of the pie available.
July 22nd, 2009 at 4:39 pm
Point taken, but, although paleoliberals don’t want to hear this, the financial sector as a whole had the capacity — had it collapsed — to drag the entire economy down into Great Depression-like conditions. Nothing like this can be said of auto manufacturers or dealerships.
Is that so? I might be fuzzy on this but I remember claims that more than 10 million people would lose their jobs.
Revisionist history at it’s finest.
And thanks James. AIG bailouts are the reason Goldman has survived. Whether or not AIG survives will be the telling story.
July 22nd, 2009 at 4:48 pm
Re: Goldman Sachs — the real boost to Goldman Sachs came via bailout of AIG not directly through TARP warrants.
Re: Dealerships — the economic illiteracy of the average Congress person is truly alarming. When I hear them parrot dealers saying that they don’t “cost” the manufacturers anything I want to scream. Of course they do — they “cost” the manufacturers the ability to control the customer experience of those who might by the manufacturer’s vehicles, and by having more of them, they prevent a tighter network of dealers from having a higher profit margin with which to provide better service to those customers.
Why should automobile manufacturers have to deliver vehicls they make and own to anybody? Why can’t they sell them direct on the Internet if they want to, with a network of wholly-owned pick-up and service only locations?
And why should the domestic dealers be singled out for this highly disfavored treatment?
July 22nd, 2009 at 8:22 pm
The dealership closing was one of the better aspects of this thing. It is usually very difficult for automakers to close dealerships because as we see here dealerships seem to have lots of friends in the right places.
July 22nd, 2009 at 8:35 pm
Give interest free loans to used car dealers who can convert to electric engines.
July 22nd, 2009 at 10:48 pm
This is amazing. It’s well-known that the world is facing a glut of cars. President Obama actually managed to get GM and Chrysler organized to be leaner and more competitive, at least in comparison to what they were before, and managed to get size reductions in autop dealerships, to take effect between now and Fall 2010. I think Obama did a great job on this. And what happens? Congress ruins it, by shoveling money at the dealerships in their districts. It’s actually scary that this is a rare issue when bipartisanship prevailed: overwhelming majorities of both Democrats and Republicans came out foursquare against a very admirable and difficult accomplishment of the Obama Administration.
July 23rd, 2009 at 12:07 am
Obama should the buy the dealerships and retrofit them. Make ‘em into mini-Casinos. Slots, blackjack, poker and Pai Gow -whores out the back, health care paid for.
I did it again. Figured it all out -in one inspired flash.
July 23rd, 2009 at 1:56 am
Why should automobile manufacturers have to deliver vehicls they make and own to anybody? Why can’t they sell them direct on the Internet if they want to, with a network of wholly-owned pick-up and service only locations?
And why should the domestic dealers be singled out for this highly disfavored treatment?
I’m missing something here. What are you referring to when you say that domestic dealers are being singled out?
July 23rd, 2009 at 8:06 am
I’m waiting for Congress to fund construction of several manufacturing facilities producing 8-track tapes.
July 23rd, 2009 at 10:38 am
Excuse me: domestic manufacturers. The congressional actions are aimed at domestic car manufacturers, and the whole dealer protection racket is an artifact of the fact that, going on 40 years ago, GM et al. had a lock on automobile sales. It’s totally ridiculous.
July 23rd, 2009 at 9:20 pm
They pay a lot of money to their friends. Look up “National Automobile Dealers Association” in your favorite political contributions database and you’ll find that in any given year their PAC is right up there with Realtors, homebuilders, insurers, and investment banks. They have state associations that are similarly powerful in state legislators (and auto dealers heavily backed Schwarzenegger in the ‘03 recall election in exchange for his overturning the reinstatement on the “car tax” registration fee, a hot “populist issue” in that election. Every state has franchise laws that protect dealerships from all types of competition and unfair treatment by the manufacturers (some of this quite legitimate and intended to protect consumers as well) but in recent decades has mostly been used to protect their entrenched positions. Go read some stories on how they went to DEFCON-1 back in 1999-2000 when online internet auto brokers and manufacturers threatened to disintermediate them.
One of the reasons the prior GM CEO Rick Waggoner was shown the door was the way he handled the closure of the Oldsmobile division, allowing the dealer negotiations to drag out way too long and ultimately pay the dealers much more than necessary to make them go away. As a result, he wasn’t seen as being up to the much larger version of that same task this time.
July 23rd, 2009 at 9:36 pm
Every state has dealer licensing and franchise laws that apply to all dealers foreign and domestic, and that require that new vehicles may be sold only through franchised dealers. Most states forbid manufacturers from owning dealerships (except temporarily when say, a dealership fails and the manufacturer keeps it in operation until a new owner can be put in place). State laws also govern various aspects of the dealer/manufacturer relationship, such as territorial exclusivity, warranty work, entry/exit of dealership franchise, etc. You are correct that most of this dates back to the days when the Big 3 controlled most of the market, but with the rise in competition the past 40 years, and the internet in the last ten, much of these laws amount to a protectionist racket. The downside of this is that much of it is no longer in consumers’ best interest, a fact that was argued simultaneously back in 2001 by the Cato Institute and the Progressive Policy Institute!