Tag: auto bailout

How to Kill a Company: A Beginner’s Guide (Chapter 1, P. 1.)

As described in the current Cato Policy Report, one of the “Hard Lessons from the Auto Bailout” is that management at GM is likely to be “highly erratic, as the president and Congress wrestle for decisionmaking primacy at this majority taxpayer-owned entity.”  The “dealerships” issue is Exhibit A.

One of GM’s first decisions upon emerging from bankruptcy was to announce closures of a number of dealerships to help reduce costs. Then-nominal-CEO Fritz Henderson explained that the planned closings would save GM about $100 in distribution costs per vehicle–a few hundred million dollars per year when factoring in the millions of units GM expects to produce.

But many of GM’s congressional CEOs cried foul, demanding reconsideration from a company that had taken public funds.  The House of Representatives even passed a bill requiring companies that received federal funds to reestablish terminated dealership agreements, though no action was taken in the Senate.

However, as reported in The Hill today, Congress is fast-tracking legislation to restrict GM’s (and Chrysler’s) closings, by subjecting each decision to an arbitrator, who will “balance the economic interests of the terminated dealership, the car companies and the general public.”  A Senate aide is cited as saying legislators intend to pass this measure before Christmas.

Well, look, EVERY decision GM makes will produce winners and losers in terms of real and opportunity costs.   Hence, EVERY decision is just as worthy of legislative or executive scrutiny, if the dealership issue is the litmus test. 

With 537 CEOs, all but one of whom have bigger priorities than GM’s bottom line, GM’s future will be dictated by splitting differences, political logrolling, and managing by consensus–tactics that will assure GM’s demise.

Strike a Blow for Freedom: Don’t Buy GM

Time and again my colleagues and I have warned that the government’s takeover of GM would divorce business decisions from economics and wed them to politics ‘til death do they part. But I won’t gloat. Better to be right and satisfied that government is reasonably restrained than right and house hunting in Galt’s Gulch.

We’ve already seen the president insist on the firing of a CEO, design and negotiate a bankruptcy plan devoid of much economic merit, impose preferences about which models to produce, and assure the diabolical, undeserving management of the UAW that GM won’t import small cars from its foreign plants to make space for its U.S.-produced budget-busting green vessels.

Now Congress is attempting to legislate its way into the boardroom. Last month, GM/Obama announced plans to terminate 1,300 dealerships, as part of a larger effort to reduce costs and, ultimately, turn a “profit.” (The term “profit” is, shall we say, imprecise in this case given the amount of production subsidization, fuel taxation, and tax code inducements that will be necessary to sustain GM for the foreseeable future). But many in Congress don’t like the idea. As reported in the Detroit Free Press:

By a unanimous vote, a U.S. House committee has approved a measure that would restore 2,100 dealers either cut or scheduled to be closed by General Motors Corp. and Chrysler Group LLC.

…The bill would turn back the clock to before the companies filed for bankruptcy, restoring the 789 dealers cut by Chrysler and 1,300 dealers GM chose to wind down.

…Executives from GM and Chrysler have both told Congress that cutting dealers was essential to their survival outside of bankruptcy, saving each company billions of dollars a year and strengthen their remaining sales force.

“This legislation, if passed, would put our long-term viability at risk,” said GM spokesman Greg Martin.

I suppose you can’t really blame Congress for trying to impose its wishes on GM. After all, the Constitution is silent on the matter of which branch of government furnishes the CEO of nationalized companies.

But in all seriousness, this legislative effort is an affront to common sense and an insult to our heritage of free enterprise and capitalism. It is stunning enough to watch the slow-motion nationalization of an iconic behemoth like GM, but Congressional meddling at the operational level to stop the company from following through on an obviously wise cost-cutting measures should be a wake up call to all Americans that we are doomed to politically-driven micromanagement of the economy–into the ground no less–unless we register our disgust and dissent now!

What makes these actions evil, and not just stupid, is that Congress really does not care about whether GM is profitable or not. The Henry Waxmans of the Hill only care that GM produces green vehicles, regardless of their exorbitant costs of production and scant consumer demand. And the John Dingells (among whom are included the 200 sponsors of the bill to restore the dealerships) only want GM to provide jobs, regardless of the fact that GM needs to scale back its labor force substantially to even approach the realm of commercial viability. In other words, Congress demands that Americans subsidize GM because GM’s short-term viability is good for their political fortunes.

Enough. Show Congress that you won’t comply and that you won’t be pawns. Boycott GM. Boycott GM until the government relinquishes its grip on the company’s decision making process.

Attention GM Shareholders (That Means You!)

As my colleague Doug Bandow pointed out this morning, today’s Washington Post has an analysis about the uncertain prospects of GM ever making taxpayers whole again. It is a very similar analysis to the one I gave in this L.A. Times Dust-Up installment four weeks ago, although I find prospects unlikely, rather than just uncertain.

If GM emerges from bankruptcy next month in accordance with the pre-packaged Obama plan (as expected), taxpayers will be on the hook for $50 billion. That $50 billion will buy taxpayers a 60 percent stake in the company, which according to the laws of mathematics means that GM has to be worth $83.33 billion for the taxpayers to get their equity back without making a dime in capital gains or interest.  In the L.A. Times, I asked:

How and when will that ever happen? At its peak in 2000, GM’s value (based on its market capitalization) stood at $60 billion. Thus, the minimum benchmark for “success” will require a 38% increase in GM’s value from where it was in the heady days of 2000, when Americans were purchasing 16 million vehicles per year. U.S. demand projections for the next few years come in at around 10 million vehicles. Taxpayer ownership of GM is something we should all get used to, and the “investment” is only going to grow larger. Think Amtrak.

Fed to BoA: ‘We Will Not Leave You in the Lurch’

Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.

While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.

One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”

If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.

One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.

While BoA has been saved, it appears that the rule of law has been “left in the lurch.”

A Nation of Lawlessness

The matter of Chrysler’s bankruptcy seems to have rendered quaint our system of checks and balances. President Obama is breaking the law and the other two branches are letting him get away with it. One can probably understand how a smitten public might casually allow this president a stipend of unconstitutional acts, since he doesn’t scowl like Nixon or stutter like Bush. But, even a popular president (in particular, a popular president) must be held in check by the legislative and judicial branches.

And that’s not happening.

On Tuesday at 4:00 pm, Justice Ruth Bader Ginsburg “stayed pending further order” the bankruptcy-related transactions of Chrysler, giving hope the Supreme Court might hear the appeal filed on behalf of certain Indiana state pension and construction funds, who claim that their property rights as secured creditors were violated by the forced sale and that the use of Troubled Asset Relief Program funds to support Chrysler and facilitate its restructuring was illegal. Only 28 hours later, the Supreme Court decided against taking the appeal, despite the seemingly compelling issues at hand.

Just as the Bush administration was telling Congress last September that there was no time to debate the merits of a financial bailout and that the only course was to give Treasury Secretary Paulson carte blanche immediately to spend $700 billion, the Obama administration was telling the Supreme Court this week that time was of the essence and that Fiat would walk away from the Chrysler deal if it wasn’t allowed to proceed right away. Was that the decisive factor in the Supreme Courts rejection of the appeal? It seems to me the appeal contains some serious constitutional issues worthy of judicial consideration (consideration that goes beyond merely rubber-stamping the Obama administration’s pre-packaged, politically-driven bankruptcy plan for Chrysler, which is what Judge Gonzalez appears to have done).

But it’s now a done deal, possibly facilitated by illegalities.

I’m struck by the relative quiet about this issue (in the mainstream media and the blogosphere). Maybe we’re all just too numb and shell shocked by the blitzkrieg of government interventions over the past 9 months that it’s no longer possible to feel alarmed or outraged by just another government act that would have been unthinkable this time last year.

Well wake up!

There is a compelling legal argument against using TARP funds to support automobile producers. (Obviously, there is a compelling economic argument, as well.) Convincing the courts to hear the argument and subsequently persuading judges (probably up to the Supreme Court) of its merits will likely be the last chance to spare us the nationalization of General Motors.

As you may recall, there wasn’t a whole lot of clarity about how the Treasury’s use of TARP funds would be limited or defined. Lots of discretion was granted the Treasury Secretary. However, Section 101(a)(1) of the law establishing the TARP stipulates:

“The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.” (My emphasis).

Neither Chrysler nor GM is a financial institution and therefore neither can receive TARP money.  There’s the argument, plain and simple.  Congress authorized funds for a defined use; the executive breached those boundaries, and thus acted illegally. Is it more complicated than that?

President Bush was the first to break the law by authorizing $17.4 billion in TARP funds for GM and Chrysler, circumventing the wishes of Congress, which had recently voted against an auto bailout.  And President Obama has followed suit, providing funding the Chrysler and GM during bankruptcy.

If there’s any doubt that TARP funds were not to be used for automobile companies, consider the fact that the same House of Representatives that passed the legislation creating the TARP in October also passed a bill specifically authorizing the use of TARP funds for automobile companies in December. (There was never a vote in the Senate so it never became law.)  Such legislation wouldn’t have been necessary if the intent of Congress was to allow TARP funds to be used for automakers originally.  Thus, there are two conclusions to draw here. First, the 110th Congress didn’t think the TARP legislation, which it had passed two months earlier, allowed TARP funds to be used for automakers; and second, Congress was too cowardly to bring the matter to the Supreme Court, thereby exercising its constitutional responsibility and allowing the judiciary an opportunity to exercise its.

Let’s hope the judiciary finds the opportunity to check the legality of the executive’s implementation of the legislature’s instructions, as far as the people’s money is concerned.

GM’s Last Capitalist Act: Filing for Bankruptcy Protection

It’s not as if we didn’t know this was going to happen to GM for a long time now.

GM’s bankruptcy announcement today is perhaps the least shocking news we’ve heard about the company in more than seven months. It might well be remembered as the company’s last act of capitalism.

If GM emerges from bankruptcy organized and governed by the plan created by the Obama administration, it is impossible to see how free markets will have anything to do with the U.S. auto industry. With taxpayers on the hook for $50 billion (at a minimum), the administration will do whatever it has to – including tilting the playing field with policies that induce consumers to buy GM or hamstring GM’s competition or subsidize its costs – in order for GM to succeed.

Thus, what’s going to happen to Ford? With the public aware that the administration will go to bat for GM, who will want to own Ford stock?  Who will lend Ford money (particularly in light of the way GM’s and Chrysler’s bondholders were treated).  Who wants to compete against an entity backed by an unrestrained national treasury?

Ultimately, if I’m a member of Ford management or a large shareholder, I’m thinking that my biggest competitors, who’ve made terrible business decisions over the years, just got their debts erased and their downsides covered.  Thus, even if my balance sheet is healthy enough to go it alone, why bother?  And that calculation presents the specter of another taxpayer bailout to the tunes of tens of billions of dollars, and another government-run auto company.