Aftermath Of The GM Bailout

General Motors — the company that American taxpayers bailed out less than a decade ago, rescuing the company from near-certain bankruptcy after years of mismanagement — continues to struggle, and the dominoes that were toppled by the bailout decision continue to fall.

636198172298775780-lsjbrd-04-17-2016-gli-1-a001-2016-04-14-img-gm-shutdown-jpg-1-1-fhe0e7gq-l792930015-img-gm-shutdown-jpg-1-1-fhe0e7gqYesterday the company announced that it is engaging in a massive restructuring that will close assembly plants in Ohio, Michigan, and Ontario, Canada, eliminate thousands of jobs, and end some car lines.  One of the vehicles  being discontinued is the Chevy Volt, the electric hybrid GM rolled out to great fanfare.  The company said that “GM is continuing to take proactive steps to improve overall business performance, including the reorganization of its global product development staffs, the realignment of its manufacturing capacity and a reduction of salaried workforce.”  GM’s CEO, Mary Barra, said “GM wants to stay in front of changing market conditions and customer preferences for its long-term success.”  One of the “changing market conditions” is the declining public demand for passenger cars like the Volt and the Chevy Impala, which also is being discontinued.

President Trump and the United Auto Workers are both unhappy at the GM move.  Trump said he didn’t like GM’s decision and reports that he told Barra “You know, this country has done a lot for General Motors. You better get back in there soon. That’s Ohio, and you better get back in there soon.”  The UAW, which will see the loss of lots of blue collar jobs held by its members, said:  “This callous decision by GM to reduce or cease operations in American plants, while opening or increasing production in Mexico and China plants for sales to American consumers, is, in its implementation, profoundly damaging to our American workforce.”  The UAW news release added that “GM’s production decisions, in light of employee concessions during the economic downturn and a taxpayer bailout from bankruptcy, puts profits before the working families of this country whose personal sacrifices stood with GM during those dark days.”

GM’s decision will no doubt be devastating to those employees who lose their jobs and the communities where the plants will close.  But it also makes me wonder how even the advocates for the taxpayer bailout of GM less than 10 years ago feel about their decision to prop up GM now.  The underlying question raised by the UAW and President Trump is legitimate:  Was the bailout worth it, in view of these kinds of decisions?  GM remains a public company, and it gets to make decisions that it considers to be in its own competitive interest.  And if changing market conditions really do require GM to cut thousands of jobs that the bailout advocates expected would continue indefinitely, that may just tells you something about the wisdom of taxpayer bailouts generally.

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That Unseemly Campaign Mode

Kish and I watched President Obama’s speech about our response to the depravations of the Islamic State in Iraq and Syria last night.  I think we have to do something about those vicious Islamic terrorists, so I am glad the President has decided to take action.  As for his strategy — well, if it doesn’t work, we can try something else.  The main takeaway is that we’re going to act, once again, in an effort to lead the world to a better place.

The President struck a jarring note at the end of the speech, when he invoked both the 9/11 attack and the economic downturn of 2008 and argued that the United States “is better positioned today to seize the future than any other nation on Earth.”  He added:

“Our technology companies and universities are unmatched. Our manufacturing and auto industries are thriving. Energy independence is closer than it’s been in decades. For all the work that remains, our businesses are in the longest uninterrupted stretch of job creation in our history. Despite all the divisions and discord within our democracy, I see the grit and determination and common goodness of the American people every single day, and that makes me more confident than ever about our country’s future.”

This snippet of happy-talk was dubious — Our universities are great when they are gouging students with outrageous tuitions and producing debt-crippled graduates?  Our auto industries are thriving when GM produces defective cars while living on federal support? — and obviously has nothing to do with ISIS or terrorism.  It came across as unseemly politicking as a mid-term election approaches and thereby detracted from the rest of the speech.  Perhaps the President doesn’t realize it, but when he is addressing national security and describing our strategy to defeat another bloody terrorist group and then veers into campaign mode, he presents himself as focused on internal politics and less than serious about the external mission he is announcing. It’s not a positive juxtaposition.

Today marks another anniversary of 9/11 and, as a result of the President’s speech last night, we will open another front in the long and difficult struggle against terrorism.  The memories of that black day 13 years ago remain raw and painful.  Due respect for 9/11 requires that our leaders continue to focus on our bipartisan, national goal of keeping our country safe from another attack.  When 9/11 is invoked, electioneering should not follow.

Calling With A Final Update On That GM Investment

Mr. Webner, long time, no talk! It’s the federal government calling to update you on your GM investment.

For the love of God! Leave me alone! We got rid of our land line so you wouldn’t bother us any more. How did you get this number?

Don’t be naive, Mr. Webner. We’re the federal government. Now let’s talk about that GM investment. We liquidated the last of our GM investment in December, and incurred only a $10 billion loss on our $49.5 billion investment!. Isn’t that wonderful?

Wait a second . . . did you say a $10 billion loss? You’re happy that the government lost more than 20 percent of our investment in GM?

That’s right. GM stock has gone in the dumper over the last few months. By wisely selling when we did, we’ve managed to keep our losses to only $10 billion. If we’d held on and tried to sell now, we’d have a much bigger loss!

Isn’t the drop in GM’s stock due to some extent to its problems with faulty vehicles due to a faulty ignition switch? Were you guys aware of that problem when you decided to invest our money in GM stock and then to sell it when you did?

(Silence.)

You know, there was a Senate hearing today on that issue. More than 2.5 million GM cars worldwide have been recalled, and Senators suggested that GM’s failure to act more promptly raised issues of criminality. Say, do you think you guys might be in trouble because you were aware of that whole issue?

(Heavy breathing.)

You know, the whole recall situation makes your decision to sell GM stock seem really convenient. As long as we’re on the phone, maybe you can answer this question — what did the government know, and when did it know it? Was there some insider trading here? Maybe you should get a lawyer.

(Click.)

Calling To Report On That GM Investment

Calling To Update The Report On That GM Investment

Calling With Another Update On That GM Investment

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.

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.

Bolting The Volt

It hasn’t been easy for the Chevy Volt.  Announced with great fanfare as the electric hybrid, alternative energy car of the future, the Volt has had problems getting traction with consumers.

The most recent news is that some Chevrolet dealers don’t want to take their allotment of Volts.  The sales of the car have been disappointing — only 7,671 were sold last year — and there have been some concerns about the risk of fires in the Volt’s battery packs, which led to a government investigation that concluded the cars weren’t at a greater fire risk.  Whatever the reason, dealers are balking at accepting lots of Volts and devoting precious showroom and on-the-lot space to a car that most consumers apparently don’t want.

Some people hoped that the Volt would lead General Motors back to profitability.  The Volt hasn’t filled that role.  And dealers are pretty reliable barometers of consumer demand.  If hordes of potential buyers were flooding dealerships demanding a Volt, the dealers would be perfectly happy to sell them.  The fact that dealers don’t want even a modest allotment of the cars is a strong indication that America isn’t quite ready to be an electric car nation.