With profits of $3.2 billion, GM recorded its best financial quarter in ten years and its fifth-consecutive profitable quarter. Predictably, those earnings have been hailed by some as a validation of government intervention. The Washington Post’s E.J. Dionne asserted: “Far too little attention has been paid to the success of the government’s rescue of the Detroit-based auto companies, and almost no attention has been paid to how completely and utterly wrong opponents of the bailout were when they insisted it was doomed to failure.”
Former Michigan governor Jennifer Granholm tweeted: “To all of you in the strangle-government crowd, who said the bailout would never work — I’m just sayin.”
But only the most gullible observers would accept GM’s profits as an appropriate measure of the wisdom of the auto bailout. Those profits speak only to the fact that politicians committed over $50 billion to the task of rescuing a single company. With debts expunged, cash infused, inefficiencies severed, ownership reconstituted, sales rebates underwritten, and political obstacles steamrolled — all in the midst of a cyclical U.S. recovery and structural global expansion in auto demand — only the most incompetent operation could fail to make big profits. To that point, it’s worth noting that more than half of GM’s reported profit — $1.8 billion of $3.2 billion — is attributable to the one-time sales of shares in Ally Financial and Delphi, which says nothing about whether GM can make and sell automobiles profitably going forward.
In any case, contrary to Dionne’s and Granholm’s assertions, opposition to the bailout wasn’t premised on the assumption that government couldn’t marshal public resources to make GM profitable. Opposition was borne out of concern that the government would do just that. And it did — opening Pandora’s Box. Any legitimate verdict on the efficacy of the intervention must account for the costs of mitigating the problems that escaped the box. Those costs relate to the facts that:
- The intervention on GM’s (and Chrysler’s) behalf denied the spoils of competition — the market share, sales revenues, profits, and productive assets — to Ford, Honda, Hyundai, and all of the other automakers that made better products, made better operational decisions, were more efficient, or were more responsive to consumer demands than GM, thereby short-circuiting a feedback loop that is essential to the healthy functioning of competitive market economies;
- Funds specifically earmarked for financial institutions under the Troubled Asset Relief Program (TARP) were illegally diverted to GM and Chrysler by the Bush administration in circumvention of the express wish of Congress not to bail out automakers;
- Supposedly secured bondholders’ property was stolen in the haste of the Obama administration’s desire to accomplish preferred, post-bankruptcy ownership structures of GM and Chrysler;
- The government’s willingness to intervene in the auto market under false pretenses to pick winners and losers is a significant cause of the regime uncertainty that has pervaded the U.S. economy, deterred business investment and job creation, and slowed the recovery ever since;
- Foreign governments have been less reluctant to subsidize their own firms in chosen industries or to find reasons to inhibit sales of U.S. automobiles in their markets on the grounds that government-subsidized competition is unfair.
These are all real costs with real consequences that are somewhat difficult to quantify. But that doesn’t mean they should be swept under the rug. It means that we should think before engaging in politically-driven triumphalism. Furthermore, focusing merely on the direct bailout cost of $50 billion (which is really a conservative figure since it excludes funds spent on behalf of GM’s former financial arm GMAC; GM’s portion of the $25 billion slush fund to underwrite research and development in green auto technology; and the $7,500 tax credit granted for every new purchase of a Chevy Volt), it is impossible to deem the bailout a success.
And this all brings us to the president’s quagmire.
The administration wants to put maximum distance between the episode of GM’s nationalization and the 2012 campaign season, which is nearly upon us. Better to not remind independent voters why they regret (or once regretted) the choice they made in 2008.
The soonest the U.S. Treasury can sell the remaining 500 million shares (according to terms of the initial public offering) is May 22, but the administration would also like to “make the taxpayers whole.” The problem for the president on that score is that the stock price — even in the wake of this week’s earnings report — isn’t cooperating. As of this morning’s opening bell, GM stock was valued at $31.07 per share. If all of the 500 million remaining publicly-owned shares could be sold at that price, the Treasury would net less than $16 billion. Add that to the $23 billion raised from the initial public offering last November, and the “direct” public loss on GM is about $11 billion — calculated as a $50 billion outlay minus a $39 billion return.
To net $50 billion, those 500 million public shares must be sold at an average price of just over $53 — a virtual impossibility anytime soon. Why? The most significant factor suppressing the stock value is the market’s knowledge that the largest single holder of GM stock wants to unload about 500 million shares in the short term. That fact will continue to trump any positive news about GM and its profit potential, not that such news should be expected.
Projections about gasoline prices vary, but as long as prices at the pump remain in the $4 range, GM is going to suffer. Among major automakers, GM is most exposed to the downside of high gasoline prices. Despite all of the subsidies and all of the hoopla over the Chevy Volt (only 1,700 units have been sold through April 2011) and the Chevy Cruse (now subject to a steering column recall that won’t help repair negative quality perceptions), GM does not have much of a competitive presence in the small car market. Though GM held the largest overall U.S. market share in 2010, it had the smallest share (8.4%) of the small car market, which is where the demand will be if high gas prices persist. GM will certainly have to do better in that segment once the federally mandated average fleet fuel efficiency standard rise to 35.5 miles per gallon in 2016.
Deservedly reaping what it sowed, the administration finds itself in an unenviable position. It can entirely divest of GM in the short term at what would likely be a $10-to-$15 billion taxpayer loss (the stock price will drop if 500 million shares are put up for sale in short period) and face the ire of an increasingly cost- and budget-conscious electorate. Or the administration can hold onto the stock, hoping against hope that GM experiences economic fortunes good enough to more than compensate for the stock price-suppressing effect of the market’s knowledge of an imminent massive sales, while contending with accusations of market meddling and industrial policy.
Or, the administration can do what it is going to do: first, lower expectations that the taxpayer will ever recover $50 billion. Here’s a recent statement by Tim Geithner: “We’re going to lose money in the auto industry … We didn’t do these things to maximize return. We did them to save jobs. The biggest impact of these programs was in the millions of jobs saved.” That’s a safe counterfactual, since it can never be tested or proved. (There are 225,000 fewer jobs in the auto industry as of March 2011 than there were in November 2008, when the bailout process began.)
Second, the administration will argue that the Obama administration is only on the hook for $40 billion (the first $10 billion having coming from Bush). In a post-IPO, November 2010 statement revealing of a man less concerned with nation’s finances than his own political prospects, President Obama asserted: “American taxpayers are now positioned to recover more than my administration invested in GM, and that’s a good thing.” (My emphasis).
The administration should divest as soon as possible, without regard to the stock price. Keeping the government’s tentacles around a large firm in an important industry will keep the door open wider to industrial policy and will deter market-driven decision-making throughout the industry, possibly keeping the brakes on the recovery. Yes, there will be a significant loss to taxpayers. But the right lesson to learn from this chapter in history is that government interventions carry real economic costs.
