Why Obama let Detroit (city) go bankrupt

Posted by hpayne on July 30, 2013

In June 2009 a team of Jones Day lawyers, including Kevyn Orr, defended Chrysler in federal court against some 100,000 Indiana teacher and police pensioners. They were suing the bankrupt Detroit company claiming its offer of just 29 cents for their secured bonds was illegal. The pensioners’ Chrysler investment was part of their retirement income, yet their lawsuit — filed by Indiana’s treasurer — received little media attention and no sympathy from Washington Democrats or the Obama administration. Bankruptcy Judge Arthur Gonzalez quickly dismissed the suit, saying the public employee pensions were less important than saving Chrysler and the economy from harm.

While public employee unions suffered, however, their auto worker cousins in the Chrysler (and GM bailouts) got preferential treatment, with President Obama’s auto task force giving the UAW significant ownership of the two companies and full funding of their pensions.

Fast forward to 2013 and once again a bankrupt Detroit, this time the municipality, is making headlines as now-Emergency Manager Kevyn Orr is under siege from public employee unions and union-bound politicians demanding Washington intervention. Barack Obama, however, is nowhere to be found. He has, to quote the infamous Mitt Romney column that Obama exploited to win reelection in 2012, “let Detroit go bankrupt.”

Why the aboutface from the White House on Detroit just four years after it saved Motown automakers — and just two years after Obama made saving Detroit a centerpiece of his re-election campaign?

“Because of the UAW union,” says Pat Caddell, veteran Democratic campaign consultant. An important difference, says Caddell and others political experts, is that — unlike the Detroit auto bankruptcies — there is no UAW to save this time.

As in the Chrysler and GM bankruptcies, Detroit public employee pensions are a concern. But they are local political players, say experts, and not enough of a concern to warrant intervention from a Democratic president. The UAW was a different matter in the auto bailouts because automakers are major employers of a special interest crucial to national Democratic Party fundraising and grassroots support. In 2012, for example, the UAW gave $12 million to Democratic super PACs.

The auto rescues deserve their nickname, the UAW Bailout.

“Much was up in the air politically in 2009,” says Caddell, who has worked for numerous presidential campaigns including Jimmy Carter and Joe Biden. “The UAW represented a broader constituency than just Michigan. It was crucial in Ohio and other key political states. There were a lot of subcontractors — a lot of unions — involved.”

Michael Barone, a Detroit native, veteran Washington political analyst and author of the respected Almanac of American Politics, points out that there are important economic and political differences that separate the Detroit auto and city bankruptcies. Today, the U.S. economy is in recovery whereas in 2009 it was so fragile that many economists felt some federal intervention in GM and Chrysler was crucial to prevent a larger depression. Furthermore, Congress had appropriated $700 billion in TARP money to help save crucial institutions — and President Bush has already dipped into TARP for $13 billion in December 2008 to aid the automakers.

But while many politicians, including Romney, advocated federal intervention to help the Detroit automakers through Chapter 11, President Obama’s takeover of the industry was extraordinary. His auto task force ruthlessly dictated terms to secured bondholders (including those teacher and police pensioners), handed over half of Chrysler’s ownership to the UAW, and rewrote the rules of bankruptcy so that the companies and UAW emerged intact.

All this despite the fact that, like a Detroit city bailout today, public opinion polls opposed bailouts and many worried about the precedent set for other corporate bankruptcies.

“The UAW is a greater national presence,” says Barone in explaining why managing the auto bankruptcies was such a key priority. “GM and Chrysler would have more active members (with White House intervention). The public employee unions are important in turnout for local elections, but they are less important to Democratic members of Congress.”

Indeed, in his frequent visits to Detroit, Obama has largely ignored city leaders and focused attention on UAW auto plants.

This angers Democratic consultant Caddell who says Obama’s cold-shoulder (so far) to Detroit’s Chapter 9 betrays a party that takes majority-black cities for granted. “It’s one of the biggest problems I have with my party,” he says. “The feeling is ‘we already have those votes so why worry about them?’ What happens in minority cities is of little interest” to Washington.

 

Comments are closed.