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Taking Account of the Auto Bailouts


On Tuesday, the Treasury Department announced that it will sell its stake in General Motors within the next 15 months, despite the fact that it will take a substantial loss, most likely more than $10 billion, in doing so (this is in addition to the costs of forgone taxes and forgiven bridge loans). The U.S. government still holds 32 percent of the company, or about 500 million shares, 200 million of which it will dispose of before the end of the year.

GM will be buying those shares back for a price of $5.5 billion, or $27.50 a share, 8 percent above the market price when the decision was approved by GM’s board. While I’m of course in no position to assess whether this is actually the right time to sell for the government to minimize its losses (GM’s stock will inevitably rise after this and the final disposition), it’s worth pointing out that selling at this price makes it realistically impossible for the U.S. government not to lose billions on its investment. According to an October Treasury estimate, in order for the government to avoid a loss on the investment (leaving aside all the forgone taxes and bridge loans that went unpaid), it would have had to sell its entire stake for $53 a share. But now that it’s disposing of 40 percent of that stake for much less than that, the break-even price now rises to 70 or so dollars a share. Unless they have a fusion-powered Malibu that drives itself coming out at the Detroit auto show next month, taxpayers will be taxing a serious haircut — somewhere between $10 and 20 billion, probably.

The NYT’s Dealbook points out that, while GM has returned to profitability and its sales are up, along with American-market auto sales, government control hasn’t been too kind to the company, whose share price is now lower than it was at the time of the IPO ($33 dollars):

When G.M. was given its first loans by the Bush administration, the company was still the industry leader, with a 22 percent share of the market in the United States. After bankruptcy and its re-emergence as a public company, that dominance has eroded.

As of the end of November, G.M.’s market share had slipped below 18 percent this year, and it was struggling with hefty inventories of some major models.

And today in an online Times opinion piece, Steven Rattner, President Obama’s “auto czar” and overseer of the Detroit bailout, describes how some of those strictures worked against GM:

Like Willy the whale, General Motors has finally been freed — or nearly so. . . .

The divorce will ultimately . . . liberate G.M. from a number of government-imposed restrictions, importantly including those relating to executive compensation. These restrictions adversely affected G.M.’s ability to recruit and retain talent. Now, compensation decisions will be made by the company’s board of directors, just as they are in every other public company in America.

From Washington’s point of view, divesting its remaining shares will end an uncomfortable and distinctly un-American period of government ownership in a major industrial company.

This, of course, is Rattner’s view — one wonders if the Obama administration or the congressional leaders involved feel the same amount of revulsion about their interference, or understands the economic costs the government imposed on its vehicular vassals. If they had, presumably they would not, for instance, have imposed strictures with no practical justification on management issues such as executive compensation. Relative to billions of dollars spent on the bailout,  the amount of money spent on compensation for the top 25 executives at GM was meaningless, and yet, Treasury insisted on closely regulating it (as they’ll continue to do for the next 15 months, and as they’ll do at Ally, GM’s former financing arm).

Rattner insists that, if GM and Chrysler hadn’t been bailed out in the fall of 2008, they’d have been liquidated within weeks. Rattner is no doubt an expert financier, even if he does have to fundraise by making kickback payments to New York State pension managers, but many would quibble with his assessment of what the companies’ fate would have been without government intervention; he also does not address how government might have structured its lifeline differently.

Importantly, though, he does not shrink from blaming that perilous situation on the firms themselves and their management. #more#He discusses their low-quality product lines and poorly planned financing decisions (both of which independent Ford better avoided), though GM and Chrysler’s onerous labor contracts don’t come in for criticism. The incompetency of the firm’s management, of course, would prompt principled free marketeers to declare that the companies then deserved to fail — such is the just and efficient working of the free market.

Leaving this aside, Rattner merely asserts that it was a worthwhile intervention for the economy as a whole: “for $14 billion — 0.4 percent of the government’s annual expenditures – more than a million jobs were saved at a time when unemployment in the Midwest was well above 10 percent” Rattner’s numbers sound familiar but it’s important to remember that not even 1 million Americans work in the auto industry — the million-jobs number comes from a trade-group study that found that more than 1 million jobs were, that old saw, saved or created, over several years.

But regardless, it is refreshing to see Rattner state two things we have never heard from the Obama administration: In addition to the poor economy, it was the decisions of GM’s and Chrysler’s management, not the cruelties of the free market or the viciousness of the 1 percent, were what drove them to the brink of bankruptcy. Further, government management of the companies since then has tended to hinder, not aid, their return to profitability — you cannot, for instance, just pay your executives less and expect to get the same quality of management.

You haven’t heard these things from the president, perhaps, because he does not believe them.