Free Markets, Free People
GM bailout costs even more than previously reported
And there is more. Shikha Dalmia details it at Reason:
The Treasury Department yesterday revised its loss estimate for the Government Motors bailout from $14.33 billion to $23.6 billion, thanks to the company’s sinking stock price. GM’s Sept. 30 closing price, on which the new estimate is based, was $20.18, about $13 less than its December IPO price and $35 less than what is needed for taxpayers to break even.
The $23.6 billion represents a 25 percent loss on the feds $60 billion direct “investment” in GM. But that’s not all that taxpayers are on the hook for. As I explained previously, Uncle Sam’s special GM bankruptcy package allowed the company to write off $45 billion in previous losses going forward. This could work out to as much as $15 billion in tax savings that GM wouldn’t have had had it gone through a normal bankruptcy. Why? Because after bankruptcy, the tax liabilities of companies increase since they have no more losses to write off.
This means that the total hit to taxpayers, who still own about a quarter of the company, could add up to $38.6 billion. That’s even more that the $34 billion on the outside I had predicted in May.
You’ll remember we were vociferously against the bailout, saying the company should proceed through normal bankruptcy despite the absurd nonsense being spread about the effect of bankruptcy on jobs and the like. Had that been done, a much more stable and lean GM would have emerged. And taxpayers, meaning government, wouldn’t still own 25% of the company – in fact the government wouldn’t own any of it. Nor would unions.
The effect of government intrusion has been to worsen the company’s outlook. Again Dalmia explains the reason that the political priorities of the Obama administration will lead the company into even more troubled financial waters:
Although GM will never, ever make taxpayers whole, taxpayer losses could be mitigated if GM’s stock price rises before the Treasury sells its remaining equity, something it was supposed to do by year-end but has postponed under the circumstances. But right now at least the prospects of a serious upward move in GM’s stock don’t look too good for reasons at least partly beyond GM’s control.
GM actually has been doing quite well in North America and China with profit margins of 10 percent, among the best in the industry. How long that will last is an open question. That’s because GM’s new competitors are not Toyota and Honda that share its cost structure but Hyndai and Kia that have a far leaner one. These companies concentrate on the small car market and don’t offer a full product line so GM and Ford’s most profitable vehicles—those evil, gas-guzzling, greenhouse-gas emitting SUV’s and pickup trucks—are somewhat insulated from the downward price pressure. But the greens and Obama administration want GM to reorient its product mix away from big cars and toward money-losing hybrids and electrics, something that could well put GM back in a hole.
But that’s part of the administration’s long-term strategy for ruining GM. The company’s big weak spot right now is Europe for two reasons: One, thanks to political pressure and labor resistance, it hasn’t been able to address its bloated cost structure there. Two, Europe’s economy is imploding, weakening car sales.
That’s right, government is steering the company in which it owns 25% of the stock, to orient in a direction that is bad business, but as far as the administration is concerned, good politics.
There’s a reason central planning always fails. It’s because it ignores market demand. Central planning’s core belief is it can anticipate accurately the public’s demand and produce products it will buy. See the Chevy Volt. Then see the Chevy Tahoe.
As Dalmia points out, the market for small cars is very competitive. But the sector that GM has an advantage in is politically unpopular with the party the administration represents (note again the party ideology running the agenda and not what is good for the company or the country). So the government attempts to focus the company in a direction away from its most profitable business and toward the politically acceptable but unprofitable small car sector.
Another in a long line of lessons on how central planning always fails. This particular example also points out that when ideology is left to dictate the direction of a business instead of the market the likelihood of failure goes up exponentially.
And when the strategy fails it will not be a “market failure”. It will again be government doing its usual lousy job of picking winners and losers. We, of course, end up being the ultimate losers when it makes its picks.