Rathbun: GM (Government Motors)Written by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
General Motors has become the poster child for government bailouts and the intrusion of government in the business process. Back in 2008, President Bush issued an executive order permitting the Treasury Department to utilize TARP under the Emergency Economic Stabilization Act to support the carmaker.
TARP gave GM $13.4 billion and eventually, including the Obama administration endorsement, received $50.2 billion total of taxpayer money. This amount initially gave the government a 60.8 percent ownership stake. The Canadian government owned 11.7 percent, the employees’ VEBA trust owned 17.5 percent and finally the bondholders had the remaining 10 percent.
GM eventually had an initial public offering (IPO) which reduced the government’s ownership to 32 percent, which created a realized loss. In order for the government, and the American taxpayer, to break even, the government must sell its remaining stake in GM for $52 a share. The stock is trading around 22 dollars a share.
In 2005 there were 111,000 hourly workers at GM; in 2010 it had 50,000 hourly workers. A little simple math tells us that the government spent a little over $1 million for each job it “saved” at GM.
Now if you are a GM worker and your job was saved and you are still able to pay your bills and feed your family, good for you. But if you have no trouble with the fact that the money was taken from other working taxpayers, essentially at gunpoint, to provide this to you and if you have no trouble with the fact that the amount of money was used very inefficiently then I guess you and, unfortunately, I, will get the government system we deserve.
The bondholders, who would normally be first in line in a corporate bankruptcy, not only got screwed but also vilified for wanting what was contractually theirs. Those investors lent their money in good faith to GM, knowing that if everything went south they would get most of their money back; now those investors will be very hesitant to loan money to a public corporation again.
What would have happened if the government had let GM fail and essentially restructure through normal bankruptcy rules? Would 50,000 people have been out of work? Would we no longer be able to buy GM cars and trucks? Would the economy go to zero? Would cats start sleeping with dogs?
The answer is, eventually the economy and the country would have been better off. With any growth there will be some sort of destruction. The invention of the car destroyed the buggy industry, in more modern times the invention of the CD destroyed the vinyl record industry. I could name a thousand other industries that were destroyed because of obsolescence or poor management of the company.
If GM had gone under, other companies would have picked up any slack demand in the marketplace and maybe even a new car company would have been created. At the very least, there would still be GM cars and trucks to buy from a leaner and maybe smarter company.
The problem is that now we have yet another precedent of government providing a safety net where none is needed. When I was in college Chrysler got bailed out by government loans. I disagreed then even though Lee Iacocca took only $1 in salary (although he did get a fortune in options if he succeeded) and paid back all of the money with interest to Uncle Sam. He turned the company around and made it profitable.
Big banks, green energy, oil companies, automotive companies, farming, airports, lumber companies, obsolete industries, where does it end? The problem is that it doesn’t end! We are all worse off for it even though the temporary fix feels good.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard on WSPD 1370 AM every day at 4:06 p.m. on “After the Bell” with Brian Wilson and the Afternoon Drive, and every Wednesday and Thursday at 6 p.m. throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at garyrathbun@private wealthconsultants.com.