GM Returns to Profit: Does That Mean the Bailout Was a Success?
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General Motors’ return to profitability had to jostle for attention with other big stories in last week’s newspapers, notably the burning of Bangkok, the resurgence of Iceland’s volcano, and the Greek crisis and bailout, but it stood out nonetheless. Here was a bankrupt company, delisted from the New York Stock Exchange and deprived of its 83-year place in the Dow Industrial Average, now owned by an unholy trinity of the U.S. and Canadian governments and the United Autoworkers, showing a respectable first quarter profit almost exactly a year after it filed for bankruptcy protection. Although axing various brands like Hummer, Saturn, and Pontiac, closing plants, and laying off thousands of workers played a big part, no less significant was a nearly 50% increase in GM sales, from $22 billion in the first quarter of 2009 to over $31 billion in the first three months of this year. GM’s position – on its own and via several joint ventures – in the Chinese market is a big part of the story, but nowhere near as miraculous as the $1.2 billion quarterly profit of its North American operations, which seemed to exemplify all that was wrong about the company, from its arrogant and hidebound management to ruinous labor practices and retirement benefits that by some estimates added $1,500 to the cost of every car. Who would have predicted that such a potent example of irreversible industrial decline could be so quickly…reversed? I was skeptical about the GM bailout/takeover from the beginning, and I gave voice to my apprehensions in this blog and elsewhere. I believed, and I still believe, that government has no business being in business, something the Swedes were ready enough to say when faced with the collapse of Saab, but which the Obama White House and the Congress were not. I also objected because GM’s senior creditors got a tiny fraction of what they were owed (and were denounced by the President as greedy speculators when they dared complain) while the union was handed a 17.5 percent ownership stake in the company: not worth much at that time, but likely to be worth a great deal if and when GM recovers. Honesty, however, obliges me to ask if my original assessment was wrong, if my view that government should keep its nose out of business is nothing more than a quaint superstition – like abolishing the Fed or returning to the gold standard – in an evolving “post-capitalist” world. Leaving aside the question of whether last quarter’s results confirm a rosy future for GM, shouldn’t the results be allowed to speak for themselves? Shouldn’t we judge the bailout at least a qualified success? Not so fast. As a shareholder, albeit minimally and involuntarily, I of course hope GM will succeed, but its success would prove nothing. Remember the $7,600 coffeemaker, the $700 toilet seat, and the $436 hammer that caused a military procurement scandal in the 1980s? No doubt the coffeemaker served up a perfectly adequate cup of java, but it probably wasn’t the most effective or least costly option. So the question is not so much whether the bailout will succeed, but how it stacks up against the alternative, which would have been to let GM go into bankruptcy without government assistance. First, we would have saved not only the $56.7 billion official price tag of the bailout, but also the $17 billion in TARP funds poured into the restructuring of GMAC, the finance arm of GM, as well as other items that may leave little change from $100 billion. Before going into Chapter 11 GM employed 91,000 people in the U.S., and has since cut nearly 23,000 jobs, bringing the current total to around 68,500. Supporters of the bailout argued that job losses would be much greater if GM went into an unstructured bankruptcy, which could have led to liquidation, eliminating all 91,000 jobs plus as many as a million more in parts suppliers and other companies that depend on GM for their livelihood. But that outcome was never remotely likely; Americans buy a certain (if smaller) number of cars each year, most of which will be assembled in the U.S. with a high proportion of U.S. components. Whether those cars bear a GM or a Honda nameplate is almost beside the point. Most of the famous British automobile marques that still exist are owned by foreigners and built mainly in places like China and India, but the auto industry employs an estimated 800,000 people in Britain, less than the one million plus of the 1960s, but a substantial number all the same. It’s just that they are making Nissans and Hondas instead of Morris Minors. My worst fears about the consequences of a government takeover of GM may never come to pass, but it’s probable that the most apocalyptic fears of the supporters of the bailout would not have materialized either. Having spent a fair chunk of my career nosing through the wreckage of state-owned companies in Africa and Eastern Europe, I can attest that the odds are highly stacked against the success of state ownership and management of businesses. So was I wrong? In the specific case of GM the answer is maybe, partly. But in general, no. A far more likely outcome of government bailouts is what happened to Chrysler, which in 1979, technically bankrupt, received government loan guarantees of $1.2 billion, and then limped along from one ill-conceived deal to the next for the subsequent 30 years until it went bankrupt for real, at which point the government once again stepped in with over $3 billion in loans and emerged sharing majority ownership with the UAW. It turns out that what our parents told is true, for companies as well as individuals. If you never have to suffer the consequences of your mistakes, you will go on making them over and over again.

Posted 05-24-2010 2:56 PM by Charles Krakoff


Miguel Chavez wrote re: GM Returns to Profit: Does That Mean the Bailout Was a Success?
on 05-24-2010 8:56 PM

This makes a very interesting proof that history repeats itself. I do agree completely with your opinion that government-owned industries are bound to fail, in the mid- or long-term, and perhaps even sooner than that. I would suggest you looking into the state-owned industries and service companies in places like Mexico: the state-owned Pemex, the social security institute, etc. They operate largely with loses, which are absorbed by the government (socializing them via taxes) in order to keep a large number of bureaucratic jobs and offering an ever-worsening array of products and services to taxpayers and industry alike.

What I couldn't help remembering, too, was my reading of Lee Iacocca's 1984 autobiography, called precisely "Iacocca". Sure, the guy is paid by himself and has an ego bigger than the great outdoors, which eventually made him jousted off the very same company he had "saved" with the first big example of government bailouts to an auto industry... or, how he liked to call them, "guaranteed loans". But what makes the book interesting is that, reading it, looks like we're reading an account of Chrysler's and GM's current crisis: large organizations, with exaggerated overhead costs, an inadequate mix of products, flaws in the production / sales chain... you name it, they had it.

Interesting, too, is to remember that the Chrysler bailout was negotiated and ultimately approved by another Democrat government: that of Jimmy Carter.