Monday, June 15, 2009

GM ail

I just wanted to revisit a point that my good friend Logtar raised a couple of weeks ago when GM bit the bullet and filed for bankruptcy.

True to his form, Logtar is optimistic about the prospects of a restructured GM coming out of bankruptcy and competing on a global stage.

And true to my form, I'm a bit cynical. I worry that our government's decision to pour $50 billion in to a failed auto company will have unintended consequences.

Let me be clear here. I don't want GM to go bankrupt. Nobody does. Having such a large company suffer through bankruptcy is not good for America whether I like the cars or not.

But the rationale for pumping $50 billion into GM was that they were "too big to fail." That if the auto companies failed, our economy would be devastated with 9 percent unemployment.

Well, now we have a failed GM and 9 percent unemployment. Plus we're out $50 billion.

And let's face it, there's no way that a restructured GM will ever turn into a good investment for the American taxpayer. I don't even think anyone seriously believes we'll even get our original $50 billion investment back -- let alone a return on that investment.

That's all in the past. It is what it is. What worries me now is the ongoing trend this represents and the opportunities we've lost in following this approach.

For one thing there's a pretty good chance that the $50 billion investment in GM was mainly politically motivated. Nobody gets elected president if you don't win in Michigan and Pennsylvania. Allow auto companies to fail due to poor management decisions and you can pretty much kiss your re-election goodbye.

This political reality is present in many countries -- Germany, Japan, Korea. So there's a global trend of keeping automobile output artificially high. As a global system, we're allowing the automobile market to be inefficient. Too many resources are being dedicated to a product for which there is already a glut.

Again, I don't want to see the pain of a failed GM. But if we have to go through the pain anyway, shouldn't we invest our money in areas that are more deserving?

Tesla Motors, for example, has proven that it is innovative and forward thinking. Just imagine the technological leaps they could make with a $50 billion infusion. We would probably all be driving 100% electric cars within 10 years.

What's more, is this going to be a precedent for future corporate failures? What will we do when (not if, when) the big American petroleum companies are on the verge of failure because all of the oil has been pumped. Will we continue to invest billions of dollars of good money into bad companies? Shouldn't we instead seek a transition into more efficient and innovative endeavors?

Of course, all of this is academic. The bets have been placed and the dice have been cast. Nothing left to do but hope we don't lose even more.

Ah, now I know what Obama meant by "hope."

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  1. the government motors only works when there is no competition. i should since the government now has direct interest in their investment, expect them to start screwing with foreign manufacturers.

  2. Funny how all these rabid capitalists who rail against government spending of any kind... are quick to have their hands out, palms up, when in financial trouble.

  3. Of course, we're out (at least) 50 billion, plus the value of GM stock we all owned via mutual funds in our 401K's plus GM bonds held by same funds which will go the way of all flesh in bankruptcy court a la Chrysler, in favor of protecting UAW pensions and benefits. Heaven forbid that 50 billion would be returned to the taxpayer in the form of a tax credit to be used to purchase a vehicle.

    Politically motivated?



  4. Im originally from Detroit, and I remember when the government bailed Chrysler out back in the late 70's. K-car days. Remember when Lee Iacocca (sp?) was so popular that there was talk of his running for President pre-Ross Perot style? Well its true if you're too young to remember. Chrysler paid that money back surprisingly quick and had a great run. And now a lot of banks have already paid back their bailout money. Some companies will make it--some wont. Chrysler's probably done. But GM, I think they'll be around. Economies can turn around very quickly.

  5. Iacocca's Chrysler borrowed only $1 billion (as opposed to GM's $50 billion). And even Lee Iacocca thinks't GM is screwed.

  6. Well emawck,

    Perhaos Iacocca (sp?) can explain to me why if GM is "bankrupt," (which it supposedly is), why is is its stock valued at over $1.00 a share? Shouldn't the stock value be $0.00 since stockholders are always the ones left holding the bag in these situations? Why does GM stock have an value at this point? Yet it does.

  7. I'm no Jim Cramer, but I would think the $1 per share "value" of GM stock represents what investors think the real assets of the company are worth (land, buildings, factories, machinery, Aeron office chairs, etc.)

    The $50 billion the company is getting in taxpayer money also might factor into that number.

    Still, that's a pretty steep drop from it's peak of about $80 a share back in 2000.


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