Today’s Morning Bell by the Heritage Foundation is spot on…
Celebrating the company’s Wednesday initial public offering, President Barack Obama last night called his government takeover of General Motors a “success story.” “American taxpayers are now positioned to recover more than my administration invested in GM,” he said. Left unsaid is the fact that if the Obama Administration keeps selling their GM stock at the IPO price, the U.S. taxpayer will lose $10 billion on the deal, and that does not include the loans GM still owes, cash for clunkers, the Chevy Volt subsidies, or the millions of unseen costs the unprecedented intervention has inflicted on our economy.
The $10 billion figure is actually a lot better than the $38 billion figure we’d been hearing. But virtually everybody says the stock price has to go to $47-50 per share or else we take a bath.
Feel good about this? Oh – and let’s not forget that the UAW is making $4 billion off the IPO. The UAW’s cash outlay? Nada.
No matter what you hear from the President’s defenders, always remember that it did not have to be this way. As late as April 30, GM’s bondholders were willing to take a 58 percent equity stake in the company in exchange for canceling their $27 billion in unsecured GM bonds. But under their deal, the federal government would have had no control over this new company, while the United Auto Workers union would have received a minority share of the company and the taxpayers would have been protected as a secured creditor. An even better outcome would have been for the federal government not to have supplied taxpayer cash at all and let all creditors take their lumps from an unbiased bankruptcy judge. But President Obama just couldn’t keep his government out of it.
So he publicly bullied the GM bondholders into accepting a much worse deal. Under the White House plan, the federal government was awarded a 60 percent stake of GM, the Canadian government got 12.5 percent, and GM’s unions got 17.5 percent while the bondholders walked away with just 10 percent. Defenders of the bailout say all this was worthwhile because the effects of a failure of GM would have been catastrophic. But that ignores both the deal the bondholders first offered the unions and the possibility of an expedited—but non-political—bankruptcy proceeding.
Before this week, taxpayers put $49.5 billion into GM and held a majority stake in the company. The IPO allowed the Treasury to sell about a quarter of this at $33 per share, raising $13.6 billion. That leaves taxpayers, post-IPO, with $35.9 billion “invested” and about a 37 percent stake in the company. At $33 per share, that leaves taxpayers still almost $10 billion in the hole. The shares would have to jump to $51 for taxpayers to break even, a price level considered by most analysts to be unlikely.
But perhaps the biggest danger of all is the prospect of the GM “success” being used to justify future bailouts of other firms. That would be the true catastrophe. As George Mason University economist Don Boudreaux wrote:
The chief economic case against the bailout was not that huge infusions of taxpayer funds and special exemptions from bankruptcy rules could not make G.M. and Chrysler profitable. Of course they could. Instead, the heart of the case against the bailout is that it saps the life-blood of entrepreneurial capitalism. The bailout reinforces the debilitating precedent of protecting firms deemed “too big to fail.” Capital and other resources are thus kept glued by politics to familiar lines of production, thus impeding entrepreneurial initiative that would have otherwise redeployed these resources into newer, more-dynamic, and more productive industries. The “success” of the bailout is all too easy to engineer and to see. The cost of the bailout—the industries, the jobs, and the outputs that are never created—is impossible to see, but nevertheless real.
The legal and political chicanery used by the White House to produce the GM “success” story is also exactly why the United States fell from the ranks of the economically “free,” as measured by The Heritage Foundation’s Index of Economic Freedom this year. From Fannie Mae to Freddie Mac, from GM to Chrysler, from AIG to Citibank, our government continues to subvert the established rule of law. This lawlessness creates uncertainty in the business environment, and it is a huge reason why our economy is not recovering as it should be.
Letting GM go into bankruptcy would have been a painful process. But if the federal government had gotten out of the way – and we mean ALL THE WAY OUT OF THE WAY, as in suspending or repealing regulations like the CAFE standards – then the market would have been able to respond and sort out the auto industry.
GM’s fundamental problem was that it made union contracts which inflated its cost per vehicle past the point where it was viable. Foreign automakers operating non-union plants in places like Mississippi, South Carolina and Alabama were saving more than $25 per hour in labor costs, and that was the difference between profitability and bankruptcy. Perhaps the solution would have been to break GM up into its component parts and allow investors to enter into the market. A perfect example of how this might have worked if the government had gotten out of the way would have been the Hummer brand; Hummers were perfectly profitable for GM, but the Obama administration didn’t want to see the brand continue. In a normal market, a failing company with a profitable line could have sold that line to someone else to raise capital necessary to restructure itself. But someone wishing to enter into the marketplace and buying Hummer to operate as auto company all to itself couldn’t do that – because of the CAFE standards.
Meanwhile, we hear the Big Three are beginning to show signs of life – and that’s good. But the fundamental problems which caused it to take a dive in the first place haven’t been solved, so it’s probably a matter of time before we’re going to be asked to rescue Government Motors again with more money we don’t have.