Bank bailout fund underwrites automakers

The Treasury Department’s bank bailout fund is starting to look more like an automaker bailout fund as the United States gets deeper into the car business and banks work furiously to cut their ties to the government and return their bailout money.

Growing numbers of lawmakers and auto company investors are starting to complain about the arrangement, asserting that the government lacks the authority — and the expertise — to divert funds meant for financial institutions to major manufacturers.

The George W. Bush administration made an eleventh-hour decision in December to dip into the bailout fund to lend $17.4 billion to General Motors Corp. and Chrysler LLC to get them through another few months, leaving it to President Obama to find a long-term solution to their problems.

Many lawmakers went along with that move out of expedience, but Congress never voted on diverting the bank rescue funds into a major bailout of the auto sector that has burgeoned to $80 billion in size, pushed both companies into bankruptcy and nationalized Detroit’s largest manufacturer, GM.

“It is now clear that the federal government’s bailout of the auto industry several months back was a mistake,” said House Minority Whip Eric Cantor, Virginia Republican, noting that the full cost of the bailout for taxpayers is still far from clear.

Investors who are fighting the Chrysler reorganization plan and have appealed to the U.S. Supreme Court are challenging the legality of using the bailout funds to sponsor Chrysler’s bankruptcy, saying it violates the law establishing the bailout fund for banks last fall. But that is only one area where the government stepped over the line and exceeded its authority, they say.

“This battle is of epic proportions,” said Tom Lauria, an attorney for Chrysler lenders, arguing that the White House auto task force has not hesitated to abrogate the law and contractual rights of lenders to push through its bankruptcy plans for Chrysler and GM.

“For the United States government to step in, the executive office of the United States government, who under the Constitution is charged with enforcing the laws to step in and try to in effect break the laws, I think we should all be concerned about that,” he said. “That is a constitutional issue.”

The Supreme Court may agree to hear their arguments after temporarily delaying the sale of Chrysler’s best assets to a Fiat-led consortium Monday.

While a few are questioning the legality of the automaker bailout, many analysts are questioning the wisdom of the government’s move to take control of two-thirds of the U.S. auto industry and try to remake it into a “green” manufacturing center.

Chrysler and GM have made their marks — and most of their money — by making large cars and trucks that were popular with Americans even if they were heavy on emissions.

“There is already enormous pressure on GM to abandon the vehicles that make it money — gas-guzzling SUVs and pickups — in order to focus on fuel-efficient cars that lose money,” said Jim Manzi, a senior fellow at the Manhattan Institute, a free-market think tank.

“This is a terrible harbinger for the U.S. economy,” he said, especially when combined with the pressure tactics the administration used to force Chrysler’s biggest bank lenders — all recipients of bailout aid — to concede their legal rights to repayment on Chrysler loans so that the administration could forge a restructuring deal heavily favoring Chrysler’s unionized employees.

“We appear to be headed for European-style industrial policy circa 1975, with a complicated set of favors being traded between elected officials, government bureaucrats and corporate bureaucrats,” he said.

In exchange for the government largesse, for example, GM wasn’t allowed to send production of a new line of small cars to China, where labor costs are much lower.

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