Plan B?

“Government Motors,” doing business as General Motors (GM), recently concluded the biggest initial public stock offering (IPO) in United States history; it raised about $20 billion. The dog and pony show which promoted the offering was timed to coincide with the elevated level of public scrutiny following mid-term elections.

President Obama commented on the big day. He saw a “pay off” after two years of making “tough decisions”. (It must be emotionally draining to condemn taxpayers to decades of penury with bailouts and privileges for the few, while hamstringing the economy with more regulations, taxes and other curtailments of liberty for all.)

The shares were offered at $33 and rallied to about $35 amidst the euphoria. In subsequent trading the shares have performed about as expected, within modest range of the offering price. One should note that this share price represents roughly a $9 billion loss to the nominal taxpayer-owners. The stock would need to trade in the $50 range for the government shareholders to break even on the “investment”.

In the aftermath of the hype most participants—particularly the underwriters—expressed views that were a paean to the old statement: “what’s good for America is good for General Motors and vice versa”. That expression dates back to 1953 and is attributed to a former General Motors President and government man, Charles Erwin Wilson, Secretary of Defence in the Eisenhower administration.

This story is all about politics not sound economics. Dollars forcibly taken from Americans by taxation or by debt creation, which places a mortgage on future generations, have been used to bail out GM and keep United Auto Workers employees in their jobs and preserve “Cadillac” pension plans.

If the bloated GM had been permitted to immediately experience the consequences of economic failure its assets would have been allocated to investors who would try to make better use of them. Instead, through some exceptional chicanery in bankruptcy proceedings, taxpayers were dragged down a garden path to preserve some exhausted icon, while keeping Democrat supporters (UAW workers) in good standing.

Economic reality dictates that this “tough decision” makes no sense, and in time it will become evident to more taxpayers, although they will probably be the grandchildren of today’s scapegraces.

What if GM fails again? Indeed, what if the competition, such as Ford Motor Company, which has not required a bailout, continues to produce better vehicles and satisfy more customers? Let’s not forget Toyota, Kia, Hyundai and others. Most are not burdened by extravagant union-inspired employment and benefit contracts or costly extended dealer networks.

What if the reorganized GM is unable to pay off the rest of the government “investment” before going bankrupt again? Will there be another bailout? What is Plan B?

©Copyright 2010 Edward Podritske

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