Abstract: The U.S. government will lose about $23 billion on the 2008-2009 bailout of General Motors and Chrysler. President Obama emphatically defends his decision to subsidize the automakers, arguing it was necessary to prevent massive job losses. But, even accepting this premise, the government could have executed the bailout with no net cost to taxpayers. It could have—had the Administration required the United Auto Workers (UAW) to accept standard bankruptcy concessions instead of granting the union preferential treatment. The extra UAW subsidies cost $26.5 billion—more than the entire foreign aid budget in 2011. The Administration did not need to lose money to keep GM and Chrysler operating. The Detroit auto bailout was, in fact, a UAW bailout.

The government bailout of General Motors (GM) and Chrysler between 2008 and 2009 will cost taxpayers approximately $23 billion. President Barack Obama emphatically defends his decision to subsidize the automakers, arguing it was necessary to prevent massive job losses. Even if one accepts this premise, the government should—and could—have executed the bailout more efficiently, with no cost to taxpayers, had the Administration required the United Auto Workers (UAW) to accept standard bankruptcy concessions. Instead, the Obama Administration gave special treatment to the UAW above and beyond what other creditors and unions received:

• Legally, the UAW’s claims had the same status as those of other unsecured creditors, but the UAW recovered a much greater proportion of the debts that General Motors and Chrysler owed the union.
• Bankruptcy typically brings uncompetitive wages down to competitive levels. However, existing UAW members did not take pay cuts at General Motors.
• The Administration could have kept the automakers running without subsidizing the UAW’s above-market pay and benefits.
• Subsidizing UAW compensation cost $26.5 billion—more than the government spends each year on foreign aid.
• The cost of subsidizing UAW pay and benefits accounts for the entire net taxpayer losses—$23 billion—in the bailout.

UAW members at General Motors and Chrysler are among the most highly paid workers in America. High salaries are good, but they must be earned. The taxpayer losses came from the special treatment that President Obama bestowed on the UAW. The auto bailout was actually a UAW bailout.

Detroit Bankruptcy

General Motors, Chrysler, and Ford were in serious trouble well before the recession started. Decades of mistakes by both unions and management had saddled the firms with massive debts, unsustainable labor costs, product-quality problems, and an overgrown dealer network. Yet Ford mortgaged its assets, began to restructure in 2007, and did not need a bailout. The recession brought these problems to a head at GM and Chrysler. As consumers cut back on discretionary purchases—like cars—both firms ran out of money. To become profitable again the automakers needed to restructure through bankruptcy, removing obligations they could no longer afford.

GM and Chrysler instead asked Washington for a taxpayer bailout. The Bush Administration used the Troubled Asset Relief Program (TARP) to loan GM and Chrysler enough money to stay operational for the first several months of the Obama presidency. To his credit, President Obama denied the automakers the straight-up bailout they asked for. Instead, the Obama Administration forced the companies into bankruptcy as a condition of receiving government support and funded them through the bankruptcy process. The bankrupt automakers sold their assets to new "General Motors” and new "Chrysler”—companies created, capitalized, and partially owned by the government. The taxpayers spent a total of $80 billion on Chrysler, General Motors, and General Motors’ finance arm, Ally Financial.[1]

A substantial amount of these funds will never be repaid. The government has already written off or realized losses of over $7 billion.[2] More losses will come as the government sells its remaining stake in GM and Ally Financial. The Congressional Budget Office estimates that the auto bailout will ultimately cost taxpayers a total of about $20 billion.[3] The Treasury Department is even more pessimistic, projecting that, at GM’s current stock price, taxpayers will lose $23 billion.[4]

Defending the Bailout

The Obama Administration strongly defends the auto bailout, despite its cost. The President says tthat the automakers were not able to obtain private bankruptcy funding in early 2009. He argues that without government intervention General Motors and Chrysler would have liquidated, sending the Midwest into a second depression.[5]

Many analysts have pointed out that the United Auto Workers received particularly generous terms during the bankruptcy.[6] President Obama calls accusations that “paying back the unions” motivated his decision “a load of you know what.”[7] However, the Administration treated the UAW much more generously than the automakers’ other creditors and other unions, and the UAW fared much better than unions typically do in bankruptcy cases.

Bankruptcy Liabilities

General Motors and Chrysler had substantial liabilities entering bankruptcy—a major reason they went bankrupt in the first place. General Motors owed $6 billion to secured creditors and $29.9 billion to unsecured creditors. Chrysler owed $6.9 billion to first-lien secured creditors and $2 billion to second-lien secured creditors.[8] Chrysler also owed about $5 billion to unsecured trade creditors, and owed billions more in obligations to dealers and for warranties.[9]

The United Auto Workers had also created significant liabilities for the automakers. The union raised Detroit’s labor costs 50 percent to 80 percent above that of the transplant automakers, such as Toyota and Nissan. In 2006, General Motors paid its unionized workers $70.51 an hour in wages and benefits. Chrysler paid $75.86 an hour.[10] These costs put the Detroit automakers at a significant competitive disadvantage.

Detroit’s higher labor costs also included generous retirement and health care benefits. UAW employees at GM and Chrysler can collect pensions in their 50s. The automakers also provided UAW retirees with full health coverage until they became eligible for Medicare. At that point UAW retirees collected generous additional health coverage from the automakers on top of Medicare. While the average Medicare recipient spends $4,200 a year out of pocket,[12] UAW retirees in 2011 had maximum out-of-pocket expenses of $285.[13]

To reduce the financial burden of these benefits, the Detroit automakers negotiated a Voluntary Employee Beneficiary Association (VEBA)[14] with the UAW in 2007. The VEBA—funded by the automakers and partially controlled by the UAW—assumed financial responsibility for retiree health benefits. When General Motors filed for bankruptcy in 2009 it owed $20.6 billion to the UAW Retiree Medical Benefits Trust.[15] Chrysler owed the VEBA $8 billion.[16] These obligations were unsecured.

By 2009, General Motors and Chrysler lacked the money to pay their creditors, including the UAW. The Obama Administration rightly required both automakers to file for bankruptcy as a condition of receiving further money from the government.

Violating Principles of Bankruptcy

A cornerstone of bankruptcy policy is the requirement that creditors’ priorities are preserved in bankruptcy in the same order as they are preserved outside bankruptcy, a concept known as the “absolute priority rule.” The fundamental difference in priorities is between secured creditors on one hand and unsecured creditors on the other. Secured creditors, such as the bank that issues a mortgage or loans money to buy a car, have the right to seize the identified property if people fail to make payments. Unsecured creditors, such as credit card issuers, can sue individuals personally if they do not pay their bills, but cannot foreclose on someone’s house unless mortgage holders are paid off first. Secured credit, therefore, is less risky than unsecured credit because it is a guarantee that the lender will be paid before unsecured creditors are paid. In exchange, debtors pay a lower interest rate to borrow on a secured loan (just as mortgage interest rates are much lower than credit card interest rates).

While most companies (including General Motors) are able to fund their operations through the issuance of unsecured bonds, Chrysler’s bonds were secured, a testament to Chrysler’s chronic financial struggles and the risk of lending to the company.[17] In bankruptcy, the secured status of these bonds should have meant that the secured creditors would be paid in full before any money was allocated to subordinate creditors, such as the UAW’s VEBA plans. Instead, the plan imposed by the government forced Chrysler’s secured creditors to accept only 29 cents on the dollar, while the UAW recovered most of the value of its claims.

Another bankruptcy principle was also violated in both cases. A fundamental principle of bankruptcy law is the presumption that similarly situated creditors should receive similar treatment in bankruptcy unless there is a compelling reason to do otherwise.[18] Thus, all unsecured creditors should be treated similarly regardless of whether their claims arise from bonds or unfunded pension liabilities. Yet, in both cases, the UAW’s unsecured claims were treated much more generously than other unsecured creditors.

Preferential Treatment for the Union Trust Fund

The UAW’s claims had the same legal priority as those of other unsecured creditors. However, the union did substantially better in the bankruptcy. For their $29.9 billion in claims, General Motor’s unsecured creditors received 10 percent of the stock of New GM, and warrants to purchase 15 percent more at preferred prices.[19] When they were distributed those shares and warrants were worth, in present value, $8.1 billion.[20]

Had the Administration treated the UAW VEBA as it did other unsecured creditors, the VEBA would have recovered the same proportion of its debts. General Motors’ $20.6 billion obligation to the UAW would have been exchanged for 6.9 percent of the stock of New GM, and warrants to purchase 10.3 percent more at preferred prices. Those stocks and warrants would have been worth, in present value terms, $5.6 billion.[21]

Instead, the United Auto Workers collected far more of its debts than the other unsecured creditors did. The VEBA received 17.5 percent ownership of New GM, $6.5 billion of perpetual preferred stock paying a 9 percent dividend, and a note payable for $2.5 billion (repaid early for $2.8 billion).[22] The UAW sold a portion of its stake in New GM for $3.4 billion in late 2010.[23] The UAW VEBA still owns about 10 percent of New GM. Its remaining stake is worth $3.7 billion at current market prices. In present value terms, the UAW VEBA recovered a total of $17.8 billion.[24]

If the UAW VEBA had been treated like GM’s other unsecured creditors, the bailout would have cost taxpayers $12.2 billion less. The union received highly preferential treatment.

The same thing happened at Chrysler. Chrysler’s first-lien secured creditors collected $2 billion on their $6.9 billion in debt—just 29 cents on the dollar. Chrysler’s second-lien secured creditors received nothing in bankruptcy for their $2 billion in debt.[25] They were completely wiped out. Chrysler’s unsecured trade creditors also recovered none of the $5 billion they were owed.

Legally, the UAW’s claims had lower priority than those of all secured creditors. The union should have recovered nothing on its claims until secured creditors—both first-lien and second-lien—were paid in full. Since the first-lien creditors were only partially paid and the second-lien creditors were wiped out, the UAW would have normally, along with the other unsecured creditors, recovered nothing. The Administration decided nonetheless to give the UAW trust a 55 percent ownership stake in New Chrysler (subsequently diluted to 41.5 percent), currently worth $3.46 billion, and a note payable for $4.6 billion earning 9 percent interest.[26] The UAW trust recovered most of the value of its claims.

If those assets had gone to the Treasury, the bailout would have cost taxpayers—in present value terms—$9.2 billion less.[27] I Instead, the Administration gave those assets to the UAW, despite bankruptcy law assigning their debts lower priority.

Limited Concessions by Union Members

Section 1113 of the Bankruptcy Code gives bankruptcy courts explicit authority to force the rewriting of collectively bargained union contracts—like other contracts—in order to help the company become viable again. Just as bankruptcy courts reduce unsupportable debts in order to rehabilitate a company, they also reduce unsupportable union compensation and practices to competitive rates so that the company will be viable post-bankruptcy. In April 2012, for instance, the recently bankrupt American Airlines broke its union contracts after months of wrangling between management, and after the unions failed to produce a revised agreement. In other cases, the mere threat by a bankrupt company of breaking the union contract is sufficient to extract wage and benefit concessions from recalcitrant unions, as happened when Delta and United Airlines filed bankruptcy.

With GM, the UAW made some concessions during the 2009 bankruptcy. The union allowed GM to expand the use of entry-level “Tier 2” workers making half as much as regular workers. [28] This was a significant concession—by current employees on behalf of future employees.

The UAW also accepted limited concessions for existing “Tier 1” members. The union agreed to suspend their cost-of-living adjustments and performance bonuses. The union also agreed to reduce paid time off and place restrictions on overtime. The union further agreed to eliminate the JOBS bank that paid laid-off employees nearly full wages for not working.[29]

These changes reduced the automakers’ costs, but they left most of the existing members’ compensation structure. As a result, GM’s post-bankruptcy compensation of $56 an hour averaged across regular Tier 1 and entry-level Tier 2 employees is still higher than all the transplants.[30] The Tier 1 workers’ labor will still cost $64 an hour at the end of the current contract.[31] As the UAW explained it to its members, “For our active members these tentative changes mean no loss in your base hourly pay, no reduction in your healthcare, and no reduction in pensions.”[32]

Even President Obama’s “car czar” Steven Rattner has admitted that the UAW should have made larger concessions on wages and that doing so would have substantially reduced the cost of the bailouts. Rattner stated: “We asked all the stakeholders to make very significant sacrifices. We should have asked the UAW to do a bit more. We did not ask any UAW member to take a cut in their pay.”[33]

Lost Savings. In a normal bankruptcy, the pay and benefits of existing union members likely would have been reduced, probably to prevailing labor market rates. Only the taxpayer bailout allowed the UAW to avoid this. Moreover, one reason why the Senate rejected a bailout of the automakers in December 2008 was the UAW’s refusal to reduce their compensation to market rates.[34] But once the decision was made to divert already appropriated TARP funds to the task—a use that Treasury Secretary Henry Paulson initially deemed to be beyond the scope of the legitimate use of the TARP funds—neither the Bush nor Obama Administrations pressed this point.

If the bankruptcy had lowered GM’s average labor costs down to market rates, its costs would have fallen by $800 million a year. Such concessions would have reduced operating costs and the size of the government’s infusion of funds into the companies. They would have also raised profitability and thus the value of the government’s stake in GM. These concessions would have saved taxpayers—in present value terms—approximately $4.1 billion.[35]

Unionized Delphi Retirees Treated Differently. UAW members also received preferences at Delphi, the auto parts manufacturer and former GM subsidiary. When GM spun off Delphi, the automaker agreed to supplement Delphi’s UAW members’ pensions if the company went bankrupt. Delphi did go under, and in 2009 filed to have the Pension Benefit Guarantee Corporation (PBGC) take over its pension plan.

When the PBGC takes over pension benefits it guarantees them, but only to a limit. When Delphi filed for bankruptcy the maximum pension benefits were $54,000 a year for retirees aged 65 and above, with lower benefits for early retirees.[36] About half of Delphi’s union and non-union workers faced reductions in their pension benefits.[37]

New GM no longer had an obligation to supplement the Delphi pensions. The bankruptcy filing eliminated its contractual obligation to do so. However, New GM’s management—while being overseen by the Obama Administration—nonetheless agreed to spend $1 billion to supplement the pensions of Delphi’s UAW retirees. The non-union employees were not so fortunate— GM did not supplement their pensions.[38]

The TARP Inspector General is now investigating whether the Administration pressured GM to give the UAW special treatment. However, former Administration officials—including “car czar” Ron Bloom, Rattner’s successor—have refused to cooperate with the investigation or answer questions. The Inspector General “believes the Auto Task Force played a role in the pension decision,” but lacks the legal authority to force it to testify.[39]

Had New GM treated Delphi’s UAW and non-union employees equally, the Treasury could have paid $1 billion less for the bailout. Instead, some workers became more equal than others.

UAW Favored Over Other Unions

The Obama Administration also favored the UAW over other unions during the bankruptcy proceedings. At Delphi some retirees belonged to the International Union of Electrical Workers (IUE) and to the United Steel workers (USW). GM did not supplement their pensions either—only the UAW’s members received the pension boost.[40]

GM employees who belonged to other unions received particularly harsh treatment. Approximately 2,500 employees at GM’s Moraine, Ohio, assembly plant belonged to the IUE. They were among GM’s most productive workers. When GM negotiated its 2007 contract with the UAW, it agreed to transfer work from Moraine to UAW facilities. The bankruptcy deal that the Administration oversaw barred these laid-off IUE members from transferring to any of the UAW facilities. While GM has rehired many laid-off UAW members, IUE employees have remained on the sidelines.[41]

Bailout Losses Entirely Due to UAW Subsidies

Adding all of this together—the disproportionate recovery of debts for the UAW trust funds, allowing the UAW to retain above-market pay, and subsidizing Delphi’s unionized pensions—we estimate that the Administration redistributed $26.5 billion more to the UAW than it would have received had it been treated as it usually would in bankruptcy proceedings.[42] Taxpayers lost between $20 billion and $23 billion on the auto programs.[43] Thus, the entire loss to the taxpayers from the auto bailout comes from the funds diverted to the UAW.

Had the government treated the UAW in the manner required by bankruptcy law, the taxpayers would have been able to recoup their entire investment in the company. The program would have amounted to subsidized loans instead of a direct bailout. The Administration could have kept the automakers running without losing a dime.

Accomplishing this would have been straightforward. At Chrysler, the Treasury—not the UAW—could have received the $4.6 billion note and ownership of 41.5 percent of the company.[44] At General Motors, the bankruptcy process could have operated normally, reducing GM’s compensation to market levels and raising the value of the government’s shares. The Treasury could have also received the $2.5 billion note, the $6.5 billion in preferred stock, and the excess shares of GM given to the union. The Administration could have directed the firm not to treat Delphi’s UAW members better than non-union retirees and put less money into GM. Had the Administration done so American taxpayers would not have lost $23 billion.

Preferential treatment for the UAW was not necessary to keep GM or Chrysler in business. The UAW did not plan on organizing a strike in 2009. Even if it had, General Motors and Chrysler would have had no difficulty filling entry-level positions even though they paid less than transplant automakers.[45] The auto bailout was actually a UAW bailout.

The Staggering Size of the Bailout

President Obama handed the United Auto Workers $26.5 billion—more than the U.S. spent on all foreign aid programs in 2011 ($20.6 billion). The union collected 50 percent more than NASA’s $17.6 billion budget for 2011,[46] more than Missouri’s state budget ($23.2 billion), and almost as much as Indiana’s state budget ($26.7 billion).[47] The UAW subsidies cost twice as much as Congress spent last year on the Executive Office of the President, the legislative branch, and the judicial branch combined ($12.3 billion);[48] more than the Department of Labor spent on job training programs ($11.0 billion);[49] and almost as much as the cost of keeping federally funded extended unemployment insurance benefits in place in 2012 ($30.1 billion).[50]

Consequences for UAW Members. This spending greatly benefited the UAW and its members. Without the Administration’s favoritism, the union VEBAs would face a severe funding shortfall. This would force the union to increase the retirement age. UAW members would have had to wait until their 60s to collect retiree health benefits. The UAW would also have had to significantly reduce benefits for retirees enrolled in Medicare. The retiree health benefits would have become a modest supplement to Medicare.

Similarly, a smaller bailout would have required incumbent UAW members, not just new employees, to accept pay and benefit cuts. Average labor costs would have fallen to the same levels as the foreign transplants, approximately $47 an hour. While this is still substantially higher compensation than the average manufacturing worker ($32.90 an hour) it would still reduce UAW members’ standard of living. [51] Such cuts would be painful but typical for firms reorganizing in bankruptcy. Moreover, while the UAW’s members were spared much of the pain of bankruptcy, other workers were not so lucky—most notably those belonging to other unions and those enrolled in the Indiana State Police Pension Trust and the Indiana State Teachers’ Retirement Fund, which held Chrysler’s secured bonds that lost value through the politicized bankruptcy process.

Consequences for Taxpayers. These benefits for UAW members do not justify a $26 billion taxpayer handout. No one should, of course, begrudge well-paid workers their success. When it is earned, high compensation is good. If UAW members can earn $70 an hour through their productivity they are entitled to the fruits of their labor. Those who succeed because of their own efforts have earned their high pay.

However, highly compensated workers should not be entitled to automatically continue to receive high pay. They must continue to earn it through their productivity. If their compensation contributes to their companies’ bankruptcy they should not be allowed to maintain their living standards by taxing their fellow citizens.

UAW members at General Motors and Chrysler are among the most highly paid workers in America. They received more than $70 an hour in wages and benefits before the bankruptcy, and between $52 and $56 an hour now. The average American worker—whose taxes paid for the bailout—earns $30.15 an hour in wages and benefits.[52] Few Americans have the ability to retire before they can collect Social Security. Fewer still receive retirement health coverage in addition to Medicare.

Conclusion

The Obama Administration defends the cost of the auto bailout on economic grounds. The President argues that providing the money was necessary to prevent an economic catastrophe. But even if government intervention for the limited purpose of providing post-bankruptcy financing was deemed necessary due to the illiquidity of credit markets at the time, there was still no rationale for diverting tens of billions of taxpayer dollars (including taxes paid by the employees of the UAW’s lower-paid competitors) to the UAW. The preferences given to the UAW account for the entire net cost of the bailout. The bailout would have cost $26.5 billion less had the UAW been treated like GM’s and Chrysler’s other creditors. Instead, the Administration violated basic principles of bankruptcy law and transferred that money to the UAW—at taxpayer expense.

—James Sherk is Senior Policy Analyst in Labor Economics in the Center for Data Analysis at The Heritage Foundation. Todd Zywicki is a law professor at George Mason University School of Law and a Senior Scholar at the Mercatus Center at George Mason University. The authors are grateful to Kurt Rotthoff, Assistant Professor of Economics and Finance at Seton Hall University, for his assistance with the calculations in this report.

Appendix

Methodology

This Backgrounder estimates the costs to taxpayers of the more favorable treatment given to the United Auto Workers (UAW) compared to similarly situated creditors in the auto bailout. We compared the amount that the UAW received to the amount it would have received given equal treatment, expressed in present values.

Throughout this Backgrounder, the current share price of GM stock was taken as its opening price on May 1, 2012, of $23.04. A $1 decrease/increase in GM’s share price will increase/decrease taxpayer losses by approximately $500 million and will decrease/increase the UAW’s recovery by approximately $160 million.

Chrysler VEBA

Chrysler’s secured first-lien creditors collected only $0.29 per dollar of debt that they were owed, and Chrysler’s secured second-lien creditors and unsecured trade creditors collected nothing. Since the VEBA’s $8 billion in debt was unsecured, the union would normally have also collected nothing. Consequently, the cost of the bailout was assessed as the cost of the assets which the union VEBA received, and which could have gone to the Treasury Department instead.

We assume for purposes of analysis that the payout to senior creditors of Chrysler is invariant regardless of whether the subsequent return went to the government or the UAW. So, we assume that the payout from the Chrysler note and equity is the same under either scenario, but simply that it went to the government instead of the UAW.

The stock of new Chrysler is not currently publicly traded. The UAW’s stake in Chrysler (41.5 percent) was valued using the $8.33 billion market capitalization implied by the Treasury’s sale of its 6 percent ownership of Chrysler to Fiat for $500 million. That values the union’s shares at $3.46 billion.

The $4.6 billion note was valued by bringing past payments into the present using the interest rate of a treasury bill of that maturity to reflect the Treasury’s cost of borrowing. For example, the $315 million interest payment made on July 15, 2010, was brought forward using the interest rate of a two-year treasury bill issued on July 15, 2010, of 0.61 percent.

We discounted future payments using a higher interest rate to reflect the risk that they may not be paid. Throughout negotiations with the automakers, the UAW assumed a 9 percent discount rate on future obligations. To maintain comparability with the UAW’s estimates, and to avoid differences resulting from separate choices of discount rates, we discounted future payments throughout this Backgrounder at 9 percent. Arguments can be made for a lower discount rate. Choosing a lower rate would increase the present value of the assets—and thus the subsidy—given to the UAW.

The total value of the UAW’s recovery is the sum of the value of the union’s shares and the present value of the past and future payments on the note payable—$9.2 billion.

Note that the UAW did not necessarily profit on the bailout at Chrysler. The $8 billion reflects the discounted present value of payments in April 2009 that GM was obligated to make to VEBA. The $9.2 billion figure is expressed as a present value in 2012; and we used a different discount rate to bring past payments forward than the $8 billion used to bring future payments into the present. As a result the calculations treat payments owed or made between 2009 and 2012 differently, and the figures are not directly comparable.

General Motors VEBA

General Motors’ unsecured creditors were owed $29.9 billion and received 10 percent of New GM, warrants to purchase 7.5 percent of New GM at $10 a share (series A warrants), and warrants to purchase another 7.5 percent at $18.33 a share (series B warrants).

Data on the distribution of stocks and warrants to unsecured creditors were taken from the General Unsecured Creditors Trust.[53] The value of the stocks and warrants already distributed was assessed at the opening price of GM stock on the days they were distributed. The remaining undistributed 29.5 million shares and 53.7 million warrants for GM stock were valued at GM’s current share price. Past payments were also brought into the future using the interest rate on Treasury securities to calculate the present value. The total present value of the shares and warrants distributed to unsecured creditors is $8.1 billion.

At the time of the bankruptcy GM owed the UAW VEBA $20.56 billion in unsecured payments. If these obligations received equal treatment with the other unsecured creditors the union would have received $20.65 billion ÷ $29.9 billion = 68.7 percent of the equities given to the bondholders. This recovery would amount to 6.9 percent of New GM (103 million shares), series A warrants for 5.16 percent of the company (93.7 million warrants), and series B warrants to purchase another 5.16 percent (93.7 million warrants). Valued at GM’s opening stock price on the days the shares and warrants were distributed to the unsecured creditors, these equities would be worth $5.6 billion.

An alternative assumption is that the UAW received these shares before the initial public offering (IPO). In that case, had the UAW VEBA used the same investment strategy that it followed with its actual holdings of selling 100 million shares at the IPO and retaining the rest of the shares and warrants in its portfolio, the UAW VEBA’s recovery would have been $5.1 billion. The UAW received 260 million common shares of New GM, $6.5 billion in perpetual preferred stock paying a 9 percent dividend, and a note payable for $2.5 billion that was repaid in October 2010 for $2.8 billion. The UAW sold 100 million of these shares at the IPO for $34 a share, raising $3.4 billion, and retains 160,150,000 shares in its portfolio. The value of the note payable, the already paid dividend payments, and the shares sold in the IPO were expressed in present values using the appropriate short-term treasury bill rates on those dates. The value of the unsold shares of GM was calculated using the opening price of GM stock on May 1, 2012, of $23.04 a share— $3.690 billion. Future dividend payments and the repurchase of the $6.5 billion in preferred stock on December 31, 2014, were discounted using the 9 percent discount rate. The total present value of the UAW’s receipts was $17.8 billion.

The difference between the value of the UAW’s actual collection and the value of a proportional collection is the cost to the Treasury of the UAW preferences—$12.2 billion.

Delphi Retirees

The decision to supplement Delphi’s unionized retiree’s pensions cost GM an estimated $1 billion as of December 2010. It was assumed that had GM not done so the Treasury would have reduced its investment in GM by $1 billion (as of December 2010) with no loss in business performance. The $1 billion was expressed in present value using the appropriate treasury bill rate.

Labor Costs

Average hourly labor costs for UAW members remain above the rates paid by transplant automakers. We assumed that, without special preferences for the UAW, the GM bankruptcy would have reduced hourly labor costs to the midpoint of the transplants—$47 an hour. This $9 an hour reduction in GM’s labor costs, multiplied by 48,000 hourly employees working 35.5 hours a week for 52 weeks a year, would have reduced GM’s labor costs by approximately $800 million a year. These costs are approximations. GM plans to increase its workforce, which would increase the value of these concessions.

The value of these concessions to the Treasury Department was assessed by assuming this $800 million a year was retained entirely as profits and that investors assigned the same price–earnings (P/E) ratio to GM as they did historically. These estimates should be taken as an approximation. It is likely that management would have invested a portion of these savings elsewhere. It is also likely that with lower labor costs and greater investments investors would value the company more highly than they currently do. This would raise GM’s P/E ratio. However, reliably quantifying how much GM’s P/E ratio would hypothetically rise is not possible. We used GM’s historical P/E ratio and counted all savings as profits to avoid such speculation.

At the P/E ratio at which GM’s shares sold in the IPO—approximately 12—an extra $800 million in earnings would have increased GM’s market capitalization by $9.6 billion, and the value of the 28 percent of the company the Treasury Department sold, by $2.7 billion. As of May 1, 2012, GM traded at a P/E ratio of approximately 6.7. Increasing earnings by $800 million a year would raise GM’s market capitalization by $5.4 billion, and the Treasury Department’s remaining 26.5 percent (fully diluted) stake, by $1.4 billion. Forgone past payments were brought into the present using the appropriate short-term treasury bill rate. In present value terms, maintaining UAW compensation above market rates thus cost taxpayers an estimated $4.1 billion.

General Motors owes about $20 billion in unfunded UAW pension obligations, one of the major factors depressing its share price. Bankrupt companies often discharge these obligations to the Pension Benefit Guarantee Corporation (PBGC). The PBGC guarantees pension benefits up to a maximum amount. Discharging the pension obligations would have reduced pension benefits for many UAW retirees while raising costs for the government and increasing the value of GM stock. The Administration directed GM not to discharge its pension obligations. We assume that if minimizing taxpayer losses had been an Administration priority it would have similarly directed General Motors not to transfer its pension obligations to the PBGC. This represents a departure from normal bankruptcy practice, which focuses on returning the company to viability, not minimizing taxpayer losses. Had GM discharged its pension obligations, the Treasury would have recovered a substantial portion—but not all—of the PBGC losses through the resulting appreciations of the government’s shares in the company.

Discounting Values

Because these events occurred over different periods of time, the present time of each transaction is discounted to the present time period; providing an accurate estimation of the current value of the preferential treatment. Transactions occurring in the past used the (then current) treasury bill rate, for the appropriate length of time, to calculate the present value of this transaction. Following the assumptions made by the UAW, events occurring in the future use a 9 percent discount rate.