The Magazine

The Triumph of Crony Capitalism

Want to get ahead in business? Make friends in Washington.

Jul 13, 2009, Vol. 14, No. 40 • By FRED BARNES
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First President Bush, then President Obama poured billions into General Motors and Chrysler to keep the companies alive but barely breathing. That was just for starters. Next came Obama's creation of an Auto Task Force to oversee the auto companies. To head the task force, the president picked Steve Rattner, a Wall Street investor with no experience in automaking but lots in raising campaign money for Obama and Democrats.

GM and Chrysler were quickly restructured, mostly to the benefit of the United Auto Workers, the union which spent millions in 2008 to elect Obama and Democrats. The UAW now owns 17.5 percent of GM and 55 percent of Chrysler--quite a return on an investment of zero dollars. Obama said all parties should "sacrifice," but only bondholders did. They got a fraction of what they were legally entitled to receive. UAW retirees, in contrast, got a gift of $9.5 billion at GM and $14.2 billion at Chrysler.

There's an epilogue. Delphi, the auto parts manufacturer once owned by GM and still its biggest supplier, has been in bankruptcy for four years. To acquire its assets and run the company, Delphi and Obama's Auto Task Force picked an affiliate of the private equity firm Platinum Equity. There was no auction or competitive bidding, though Platinum stands to make millions in the deal. Why Platinum? The UAW favored it, sources said.

There's a name for all this: crony capitalism. Obama insists he believes in capitalism, but it's not the free market variety that he's been promoting since he became president. Obamanomics is a different strain entirely.

Crony capitalism is usually identified with Third World despots, like Hugo Chávez, who reward their friends and allies in the business and financial communities. Some might be appointed to top government jobs, as Rattner was. But the chief characteristic of crony capitalism is favoritism for some companies or organizations (unions, for example)--in loans, grants, giveaways, and specific policies.

There's another aspect. Obama isn't merely rewarding a few cronies, he's seeking more and more favored groups to reward. One way he's doing this is through his energy, health care, and other policies, which would boost certain companies and industries over others. Another way is by providing cheap capital, which gives firms an advantage over competitors who must acquire capital at higher interest rates in private markets. The Federal Reserve, along with Obama's Treasury Department, plays a big role here.

The effect of Obama's approach to business has been enormous. In less than six months, he's changed the relationship between the private sector and Washington. Companies increasingly "compete for government favoritism, not for consumer choice or preferences," says Republican representative Paul Ryan of Wisconsin.

"Members of Congress are being besieged with calls from businesses who have an expectation of getting a check from Washington," Ryan says. "The business mindset is, if the government is going to pick winners and losers, I want to be a winner. What it means is all roads lead to Washington."

Crony capitalism is a two-way street. Obama gains politically from it. His administration has guaranteed $306 billion in toxic assets (mostly subprime mortgages) held by Citigroup and taken a 34 percent ownership stake in the giant investment bank. In return, Citigroup lobbied Congress to give judges "cramdown" authority, the power to alter the terms of housing contracts. The legislation was defeated.

Obama has been adept at enlisting companies likely to profit from his policies at the expense of their competitors. In a letter to the president last week, Walmart announced support for requiring all companies to provide health insurance for employees, a key element of the president's health care initiative. Walmart, the nation's largest private employer, has an interest in an employer mandate, since its smaller rivals would have far more trouble complying.

Besides subsidizing the UAW, Obama has exploited his takeover of GM to reward at least one liberal special interest, the environmental lobby. The Auto Task Force decided GM should produce a class B, Yugo-like car in the United States (instead of China as previously planned), an auto tentatively dubbed Spark. GM has little expertise in manufacturing a cheap, lightweight, low mileage car of this class, nor is there an obvious market for it.

It's cap and trade, the core of Obama's energy policy, that offers the biggest opportunity for crony capitalism and for dividing and conquering the business community. Indeed the bill approved by the House would unleash a plethora of government favors for carefully chosen recipients. While setting a limit on overall carbon emissions, the measure would let the Obama administration hand out 85 percent of the emission allowances or credits. Fifteen percent would be auctioned.