Turnaround Investors Always Call the Shots

Law Professor Jonathan C. Lipson Defends Obama's Chrysler Intervention

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NEW YORK (AdAge.com) -- Ad Age reported last week that the government's automotive task force, appointed by President Barack Obama, cut by half the budget Chrysler planned to spend on advertising during bankruptcy. Specifically, the task force allowed the company some $68 million instead of the $134 million it sought to spend in the nine weeks it is expected to remain in Chapter 11.

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The story inspired an editorial this week and a poll, and it generated lots of chatter and some heated commentary on our website about whether the government should be exerting such force over Detroit's marketing. In an effort to get both points of view, we decided to ask two experts outside the ad business to weigh in with their opinions: Jonathan C. Lipson, professor of law at Temple University's Beasley School of Law, and James Gattuso, a senior research fellow in regulatory policy at the Heritage Foundation.

Jonathan C. Lipson
Jonathan C. Lipson
Is the government too involved with General Motors and Chrysler? This is really two related questions: 1) Should the government be involved at all? And 2) if so, is it doing too much? Short answers: Yes and no.

Let me elaborate. Like many business-law professors, I believe if you make a good product, you should get to sell it and make money. If you make a lousy product, you should go out of business.

Thus, in ordinary market conditions, I would say the government has no role in salvaging any U.S. automaker. The market has spoken, and told GM and Chrysler that they make inferior products.

The problem is that our capital markets have not worked properly since at least last September. The liquidity explosion left huge firms -- AIG, Citibank, Bank of America -- in terrible financial condition. The capital markets are understandably scared. So, the investors who might otherwise have financed a turnaround or asset sale are mostly on the sidelines. The federal government has become the investor of last resort.

It has already played this role for the financial-services industry. At this point, only those on the political fringes think the government should have allowed the capital markets to collapse entirely. So what principled argument distinguishes the auto industry? None.

Jonathan C. Lipson is a professor of law at Temple University's Beasley School of Law.
Like Wall Street, GM and Chrysler are too big and interconnected with the rest of the economy to be permitted to fail. There are credible claims that if even one collapsed, the cascade effects would devastate an already fragile economy. Thousands of jobs would be lost. As bad as things are, with no Chrysler they would be far worse.

But how much government involvement is too much?

As anyone who has spent time with distressed businesses knows, private turnaround investors always get to call the shots. There's a reason for this: They take the greatest risk. Thus, turnaround investors usually demand major changes in management, a say in company direction and preferential treatment over other investors.

While we don't know what goes on behind closed doors, it sounds like these are the sorts of things the Bush and Obama administrations have demanded of the auto industry. GM's senior management is out. Chrysler's pre-bankruptcy bondholders, unable to put up new money, have shut up. They know the federal government is their last hope for any meaningful recovery

So, the question is: Why shouldn't the government behave like any private turnaround investor? The answer is that it should. There is a certain irony in conservatives grousing about this. On the one hand, they want government to behave more like businesses. They understandably want accountability, efficiency and a reasonable return on their tax dollars.

But woe unto the government that actually acts that way. When that happens, the pitchforks come out. There are cries of fascism and calls for tea parties.

But unless they want the U.S. to become a truly third-rate power, the federal government must behave like the turnaround investor of last resort it has become.

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