Volt Jolt

During the recent Democratic National Convention, we heard a lot about how General Motors is back, thanks to its government bailout.  Now Reuters has a report that reveals, again, that things aren’t all that great at GM.

The report addresses the economics of the Chevy Volt.  Using information from industry analysts and manufacturing experts, Reuters estimates that GM could be losing as much as $49,000 on each Volt it sells.  The Reuters piece concludes that the Volt uses complex technology and expensive components and notes that analysts say it is “over-engineered and over-priced.”  GM says the Reuters report is “grossly wrong” because it doesn’t allocate product development costs over the lifetime of the Volt program — but even GM concedes that it is losing money on the car.

Volt sales are poor.  GM forecast that it would sell 40,000 Volts this year; through the first eight months of the year it had sold only 13,500 — and that’s even with an incentive program that allows a Volt buyer to get a two-year lease for as low as $199 a month.  GM has had to halt Volt production lines twice this year due to low sales, and some people question whether American consumers will ever want a plug-in car that takes hours to recharge its battery.

Politicians can argue about whether the bailout and government-sponsored bankruptcy were the best way to handle GM’s struggles and saved hundreds of thousands of jobs or instead simply locked in excessive labor costs and inept management.  Those debates shouldn’t affect a clear-eyed appraisal of GM now, four years later, with American taxpayers having invested billions of dollars in the company.  Let’s not kid ourselves:  successful companies don’t market products that are sold at less than cost.  The Reuters analysis of the bad economics of the Volt helps explain why GM’s stock price is in the doldrums, and why we should all be concerned about the company’s future rather than engaging in empty cheerleading.

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Trying To Look On the (Automotive Bailout) Bright Side

In the modern world, we tend to focus on the negative a bit more, perhaps, than we should.  Of course, in some areas it’s hard to find much of a silver lining.

Consider the results of the federal government bailout of GM and Chrysler.  Car sales have been off, and GM stock continues to slide downward to new lows.  As a result, the stock the federal government holds in GM continues to decline in value.  Last week the latest Treasury Department report on to Congress on the potential losses on the auto bailouts was released, and it estimates another $3.3 billion increase in likely losses — taking the projected loss on the investment from $21.7 billion to $25.05 billion.

The stated purpose of the bailout was to save jobs and prevent the ripple effect on suppliers that could have occurred if GM and Chrysler had failed.  Defenders of the bailout say a million jobs were saved as a result and that the move kept us from plunging into a serious economic depression.  Opponents of the action say that the jobs wouldn’t have been lost if a standard bankruptcy proceeding had occurred and that such a proceeding would have allowed stronger companies to emerge, without any need for a federal bailout.  We’ll never know, of course, because the standard bankruptcy route wasn’t tried and billions of dollars of federal funds were spent to prop up GM and Chrysler.

But we do know one thing:  it could have been worse.  Rather than investing our tax dollars in GM, the federal government could have bought Facebook shares instead.  Since that company’s ill-fated initial public offering only a few months ago, Facebook shares have gone from a high of $45 per share to a new low of $19.05 at Friday’s close — which is a drop of almost 60 percent.

Calling With Another Update On That GM Investment

Hello, Mr. Webner.  It’s one of your friendly securities analysts at the Treasury Department.  Hot enough for you?  Ha, ha!

What?  Oh, no!

Yes, Mr. Webner.  It’s me again.  Time for you to get another update on that GM investment.  This time, I’ve got good news and bad news.  Which would you rather hear first?

The bad news, I suppose.

Well, I’m sorry to say that GM’s stock price has hit another new low.  GM has lost more than one-third of its market value since it went public less than two years ago.  We’re shocked.  We thought those great commercials with likable folks talking about how smart they were to buy Chevy Volts would really cause a boom in sales.

So, how much have we lost?

Between the plummeting value of our GM stock and the tax breaks we’ve given the company to try to help it recover from decades of mismanagement, bad decisions, and short-sighted labor contracts, we’re out $35 billion.

$35 billion?!?!  But I thought my Senator was boasting about what a smart move it was to bail out GM?

He’s saying it saved jobs, Mr. Webner.  They just happen to be jobs that have been heavily subsidized by your tax dollars.

Wait — you said you had bad news and good news.  What’s the good news?

Oh, yes!  Right now, it looks like President Obama, the Democrat-controlled Senate, and the Republican-controlled House won’t be able to agree on an extension of the Bush era tax cuts.  So, after the end of the year everyone’s taxes will probably increase, and we’ll have even more of your money to invest!

Click.

Calling To Update The Report On That GM Investment

Mr. Webner, this is your securities analyst from the Treasury Department.  I wanted to give you an update on your investments.

You again?

Yes, Mr. Webner.  We’re closing in on the end of another banner year, and we just wanted to share the good news with you.

Good news, eh?  Well, what is it?

We’re happy to report that we’ve only had to increase the estimate of our loss on our auto industry investment by $9 billion.

Wait . . . did you say you are increasing the estimate of our loss by $9 billion?

That’s correct.  Unfortunately, GM’s stock price has taken a beating lately.  But let’s not get mired in details, Mr. Webner!  What’s important is that we originally thought we would lose far more money than we now think we’ll lose — so you really can look at what we have done as a gain!

So you’re trying to take credit for a disastrous investment that just might not be as disastrous as many people expected?

That’s correct, Mr. Webner.  And in the meantime, you’ve supported the development of groundbreaking technology like the Chevy Volt!  How do you like the Volts you’ve seen on the streets?  Sweet, aren’t they?

Actually, I’ve never seen a Chevy Volt on the street.  I don’t know anyone who owns one.

Well, take my word for it, Mr. Webner.  That car is poised, in a state of cat-like readiness, to take the country by storm!  Now, can I take just a few more minutes of your time to talk about our terrific investments in Fannie Mae and Freddie Mac and Solyndra?

Click.

Calling To Report On That GM Investment

Calling To Report On That GM Investment

“Mr. Webner, this is one of your securities analysts over at the Treasury Department calling to discuss the status of your investments.”

I beg your pardon?

“Yes, this is one of your analysts over at Treasury.  You’ll recall that we decided to invest $50 billion in tax dollars from you and other taxpayers in General Motors.”

Who is this, really?

“It’s the Treasury Department, Mr. Webner.  Don’t make me read your Social Security number over the phone.  I’m calling you today to report on the GM investment.  You see, we’ve decided to sell our holdings of GM stock this summer.”

Okay . . . so, how did the investment do?

“Mr. Webner, I’m very pleased to report that, if we sell at current prices, we’re likely to lose only about $11 billion.”

Wait a minute — did you say we are going to lose 11 billion dollars?!?

“Yes, that’s right.  It means we’ve only lost a bit over 20 percent of the investment!  Of course, prudence compels me to point out that the loss could be greater if the share prices fall.”

How is the stock doing, then?

“I’m sorry to say the current stock price has fallen to below the initial public offering price.”

Why?

“Well, Mr. Webner, have you been to the gas station lately?  With gas prices increasing every day, consumers surprisingly aren’t motivated to buy those huge GM pickup trucks.  And during the first part of this year, GM had to offer big sales incentives and rebates to get people to buy those quality cars that your tax dollars helped to manufacture.  Oh, and there’s been some management turnover, too.  Of course, gas prices could go down before summer, Mr. Webner.  And those Chevy Volts could start flying off the showroom floors.”

So, you are telling me that we are likely to lose even more than $11 billion unless gas prices go down and the Chevy Volt takes the country by storm?

“That’s about it, Mr. Webner.  Now, can I talk to you about our planned investments in green technology companies?”

Click.


What a Difference a Few Years Makes

While in Chicago last weekend I spent some time reading an interesting article in Vanity Fair on John McCain and how he and his views have changed over the past two years from the man who almost became president.

The article mentioned a long list of issues and what might have been done if anything under a McCain administration. Here’s the list below with a couple that I researched and added myself :

Lily Ledbetter Fair Pay Act – video shown above was the first piece of reform President Obama signed into law which offers fair pay to women – the reform was twice vetoed by President Bush and McCain was also opposed to the legislation.

Iraq – probably no troop draw down under McCain.

Iran – under McCain the United States would have maybe blockaded or possibly bombed Iran due to their nuclear ambitions and their flawed election last year.

Student Loan Reform – John McCain was not in favor of the government takeover eliminating private banks as the middlemen in the loan process.

Auto Bailout – General Motors and Chrysler would have most likely been allowed to go bankrupt causing thousands more to lose their jobs.

Wallstreet Financial Industry Reform Act – probably no significant regulation of the financial industry allowing them to continue to police themselves.  

Repeal of Don’t Ask Don’t Tell – McCain’s comments on the Senate floor railing against DADT in recent days make it clear that he did not want DADT repealed.

Stimulus Bill – McCain was against the Stimulus bill and wanted a bill with more tax cuts – its hard to tell what condition the economy would be in at this point in time under his admistration.

Healthcare Reform – perhaps some modest reforms under McCain, but nothing even close to what has been passed under Obama.

Supreme Court Justices – McCain would have almost certainly nominated two conservative judges to the court. White males ?

Hate Crime Prevention – McCain like most Republicans is against hate crimes legislation saying state laws already cover hate crimes and passing the Hate Crime Prevention Act could criminalize religious opposition to homosexuality.

Credit Card Reform – perhaps modest reform under a McCain administration, but McCain has typically voted against additional regulation of banks and their credit card practices.

While it is impossible to know for sure what might have happened had McCain taken office I think this list speaks for itself and that the President deserves some credit for his persistency to get his agenda enacted.