The GM Bailout

After the DNC, it seems like Obama is going to tout his GM bailout as the signature achievement of his administration. If you can stand it, take a look at the former Michigan Governor Jennifer Granholm. The only problem is that the bailout has been a disaster and the alternative would have been much better.

There were several possible outcomes from GM’s problems. The one Obama chose was to intervene before the normal bankruptcy reorganization was completed. First, the settlement originally cost tax payers about $65 billion dollars but because of some bad decisions, that price tag has increased by about $25 billion. That’s a lot of money.

The settlement imposed by Obama basically slaughtered all of the capital investors (the old GM stock was declared worthless) while the UAW got a gold plated deal. The 20,000 non-union workers at Delphi also got screwed and the Obama administration committed perjury about this to try to make themselves look good.

So, when Jennifer Granholm whines that no capital firm wanted to give GM money, including Bain, the answer should be, “No duh!” Who would be willing to invest in a company that will be nationalized by the government bypassing all of the normal legal protections with the result that you lose your money? The government can throw money away, but private firms are averse to throwing money away for some strange reason.

One the beneficial aspect of the normal bankruptcy process is that companies can get rid of loser contracts. Some of the bad contracts and subsidiaries were liquidated, but not all. One of the loser contracts was the labor contract with the UAW. Obama wanted to protect the UAW because they give him a lot of money and labor. Yes, in our current system, the government gives unions (or corporations!) money who then gleefully give money back to the politicians, not the tax payers. This is an inherently corrupt process, but that is a topic for another day.

There was another contract that GM needed to get rid of, and that was the European Opel division. To be blunt, that is one of the largest money pits ever. Without the government intervention by Obama, GM would have gotten rid of that. However, at the Obama appointed directors insistence, it was kept and that has cost another $25 billion and that gift has not quit giving. No one knows what the ultimate loss will be. Of course the people in Michigan know this, despite Governor Jennifer Granholm’s ridiculous speech.

Well, what would have happened if GM was allowed to go through the complete bankruptcy process? Would it have resulted in all of those jobs being lost like Granholm suggests? No. A judge would have restructured the contracts and given less to the UAW and more to the capital investors. After all, you cannot completely kill the current investors if you want new ones. After bankruptcy, it is possible that GM would have been able to function without any government bailout. Government bailouts to corporations just encourage them to act irresponsibly. It is possible, some would say inevitable, that GM would have needed a bailout anyway. Maybe, but what is certain with 20-20 hindsight is that it would not have been anywhere near as expensive, especially if they had successfully divested themselves of Opel.

What the Democrats fail to acknowledge in the GM case is that the price tag matters. If you could have achieved the positive result of making a large manufacturer viable again at a fraction of the cost, would not that have been better? Of course! When individuals evaluate a deal, they look at both the costs and the benefits. When liberals look at a deal, they first look at the intentions, and then if it goes well, they look at the results, but they rarely, if ever, consider the cost. In the real world where individuals live costs do matter.

So, who is right? Who had the foresight to predict what would be the least expensive alternative to helping GM? Was it Obama? He was the right choice if you are a UAW member. If you are a tax payer or someone with a private retirement account that had stock invested in GM (that was a lot of the investors), then the answer is an emphatic NO.

If the GM bailout was Obama’s signature achievement, then his time in the Whitehouse was a complete failure.