Dan

Calabrese

Read Dan's bio and previous columns here

April 16, 2009

And Now, the U.S. Department of Auto Manufacturing

Did you wonder at all, when the federal government decided to lend General Motors $13.4 billion to help it avoid bankruptcy, just how the feds expected to be repaid? Did it occur to you that the solution for a debt-strapped, cash-bleeding company might not be to put it $13.4 billion further into debt?

Or did you think, well, of course the federal government knows it will never see that money again? They just can’t say so while they’re giving in to the too-big-to-fail sentiment surrounding GM.

At any rate, it’s now becoming increasingly clear that the federal government has bought itself a car company. Since GM can’t manage its $28 billion debt to bondholders, and can’t come up with the $20 billion it still owes to the United Auto Workers to bankroll the fund that was supposed to take retiree health care “off the books,” there’s clearly no way it can pay back $13.4 billion to Uncle Sam.

So while the bondholders get stuck with around nine cents on the dollar, and the UAW gets some sort of ill-defined promise of payments over 20 years along with worthless stock, guess what the federal government is going to get! You, Mr. and Mrs. Taxpayer, are about to become the proud owners of 20 percent of General Motors.

Now you may be a tad stressed over the fact that GM stock has lost 93 percent of its value in the past year. That is, of course, if you’re not hung up on the fact that the federal government has no business owning a car company in the first place.

But if you’ve really followed the misadventures of the U.S. auto industry, you would understand that one of two outcomes was inevitable. Either GM was going to collapse under the weight of its own unsustainable business model, or it was going to become a quasi-public utility. It has already operated for years more like a public utility than like a for-profit, private-sector company.

GM’s primary stock-in-trade has long been politics. Years ago, GM gave up on the notion that its labor force should accept a wage structure that would permit the company to profitably sell products that people wanted to buy. Instead, it accepted arcane work rules, a bloated pay structure and mind-bogglingly generous retiree benefits. This bought GM two things it wanted. One was labor peace. The other was political clout.

Even as the company began to recognize its failings in the areas of product development and financial management, it knew it could appeal to political and media luminaries to save it for the sake of the many workers, suppliers and retirees who would find themselves beyond despair if GM failed. And if that wasn’t enough, GM could appeal on behalf of the many towns that depended on property tax revenue from GM plants to fund their local police and fire departments and school systems.

Today’s shrieks of horror over CEO Rick Wagoner’s ouster at the insistence of the president of the United States fail to recognize that it has been a very long time since GM’s primary mission was to generate profit via the free market.

The federal government’s willingness to accept GM stock in lieu of debt repayment means the taxpayers will have an increasingly important stake in the now-inevitable bankruptcy. (And no matter what they call it, it will be bankruptcy.) One line of thinking is to separate the “good” GM from the “bad” GM. The idea here is that elements of GM that can make a profit – lines like Chevrolet, Buick and Cadillac – will emerge quickly while everything else, from unprofitable lines to irresolvable liabilities, will remain tied up in court for God-knows-how-long.

Well! The government is in the car business all right! Why hasn’t the rest of business world thought of this? Take the parts of your company that are making money, and keep them. Take the other parts, and, uh, just launch them into outer space or something. Brilliant! Instant profitability for everyone, forever.

You know why nations have economic problems? Because they can’t accept the fact that the failure of ridiculous companies with dumb business models is a good and necessary thing. GM should fail. Companies who make good decisions should be allowed to fill the resulting gap with their growth and prosperity. The economy would be on a more solid footing if this happened.

Instead, we are about to inaugurate the new U.S. Department of Auto Manufacturing. And before you wax indignant about President Obama’s sinister takeover of industry, you should remember that it was GM itself that came hat-in-hand to Washington to start this ball rolling, while lots of people at all points on the political spectrum cheered it on.

Good luck with the new venture, U.S. taxpayers. You’ll need it. Boy, will you need it.

© 2009 North Star Writers Group. May not be republished without permission.

This is Column # DC273. Request permission to publish here.