The New York Times published an editorial yesterday with the title “Undermining Justice.”  Without holding back, The Times rightfully criticized the Bush Administration for forcing career attorneys out of the Department of Justice so that they could be replaced with “real Americans,” who would support a right-wing political agenda.

The editorial in particular discusses former senior Justice Department official Bradley Scholzman, who helped run the Civil Rights Division beginning in 2003.  The Times said the following:

“His disdain for the traditional independence and mission of the Civil Rights Division is palpable.  He spoke brazenly about reshaping the division by doing away with ‘pinko’ and ‘crazy lib’ lawyers and others he did not consider ‘real Americans.’”

Now Flash Forward

Let’s assume that the US Government, under the Obama Administration, becomes more aggressive in support of the automobile industry.  That doesn’t require much of a leap of faith.  Neither it is hard to imagine that a great deal of the rationale for the investment would be attributed to it being “the key to our nation’s energy independence” – that would be entirely consistent with what Obama said during and after the campaign.  So that’s an easy assumption to make as well.

As with any loan, the money given to the auto companies will have some strings attached.  It is safe to predict that one of those strings will be that the company must become more aggressive in developing, getting into production and then marketing new energy efficient cars.

When strings are normally attached to a loan, somebody from the bank audits what is done with the proceeds from the loan.  In the case of the auto manufacturers, that would be someone from Government or someone working on behalf of Government.  How will that regulator(s) approach the issue of whether the terms of the loan relating to the development of new energy efficient cars are being met?

Several years ago I worked with a client that that was a publicly owned company (since failed) that was developing electric batteries for cars.  Even then, there was conflicting technology, not unlike cassettes vs. 8-tracks or VHS vs. Beta.  There are still a large number of questions about which technologies will develop the best electric battery for a car.  In fact, there are a large number of questions about whether an electric car would make more sense than a car produced by some other energy source.

So what bias to which competing technologies will the Government loans reveal?  I think it’s pretty reasonable to say, the terms of the loan will not be bias-free.

We May Eventually See (Justifiably) Another Editorial

This time, instead of criticizing the White House for undermining the standards of the Justice Department, the editorial will criticize the White House for undermining long-standing manufacturing standards of the automotive company whose loan they oversaw.  This time, instead of lamenting the way conservative lawyers replaced liberal lawyers, the editorial will be lamenting the way government officials forced more emphasis on the electric car versus the hydrogen car, or forced more development of lead acid batteries rather than lithium-ion or nickel batteries.

Instead of the editorial saying:

“His disdain for the traditional independence and mission of the Civil Rights Division is palpable.  He spoke brazenly about reshaping the division by doing away with ‘pinko’ and ‘crazy lib’ lawyers and others he did not consider ‘real Americans,’”

Perhaps it would say:

“The government official enforcing the terms of the loan evidenced a great disdain for the gasoline-powered car that allowed citizens throughout the world to be mobile. The official spoke brazenly about how GM had to be changed dramatically by replacing ‘the hogs’ and ‘polluters’ by ‘real Americans’ who put environmental issues above all else.”

In the case of the Department of Justice, the political pressure was exerted on what is fundamentally a political institution.  And for doing that wrong, those who did it should pay the political (and possibly criminal) price.  But what happens (and what price is paid) when a corporation owned by outside investors makes a major blunder and misses an opportunity that they otherwise would have exploited but for pressure arising from the strings attached to their Government loan, “overseen” and “regulated” by at least partially politically-motivated people.  Can shareholders bring a class-action suit against the company when the company is being told what to do by the U.S. Government? Could there be a proxy fight for control of the board so that investors could get rid of governmental/political influences, especially if the loan is (as is likely) so large that the creditor (the U.S. Government) cannot walk away from its duty to oversee the loan?

I am not certain that the bailout of the auto companies is a good or bad idea.  I tend to favor a well-controlled pre-packaged Chapter 11.  But whatever ends up being done, I am quite certain that it won’t take long until we are confronting new and very important questions as I pose above.  It is the type of question that must be answered as we continue to move from Capitalism to some new form of economy where the Government has much greater direct control of the business world.  There are no rules for that world to which we are moving.  We’re going to have to discover what rules need to be created, and then we must be certain we create the right new rules.  My bet is that there is going to be a whole lot of mistakes in that process.