GM Was Profitable For Who?

While some commentators are heralding Government Motors recent announcement of a profitable quarter, Megan McArdle runs the numbers on the government’s investment, the political calculus and the likely ultimate major loss for tax payers.

What lesson, exactly, are we supposed to learn from this “success”? What question did it answer? “Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?”  I don’t think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM’s 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable.  The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy.  We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks.

And in doing the deal that they did to bail out general Motors and the auto workers union, the government broke all the rules of bankruptcy, favoring political considerations over creditors, market stability and the rule of law.

At the Wall Street Journal, David Skeel outlines not just the losses but the violations of law involved in the special bankruptcy proceedings dictated by the federal czar in charge of the auto bailouts at the expense of creditors and the unintended consequences may be the most expensive part of this crazy kind of policy.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

Some politicians may celebrate the news of GMs first quarterly profit in years. But surely GM’s prior investors aren’t celebrating. Nor are the bondholders or investors that got screwed in the political manipulation of the bankruptcy process. Nor should the tax payers that McArdle suggests will be facing a $20 to $25 billion overall loss.

Nobody should be celebrating these “profits”. The uncertainty that this kind of political manipulation of the economy creates is precisely why most businesses are reluctant to invest and banks are reluctant to lend. If business can no longer depend on the rule of law, our nation is no longer a safe or rational place to invest.

 

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