Tuesday, June 02, 2009

The 'New GM' will find it tough driving out of trouble

Business Times - 03 Jun 2009

The 'New GM' will find it tough driving out of trouble


AFTER buying more than 60 per cent of General Motors (GM), America Inc and the millions of American shareholders (aka taxpayers) are probably not very cheerful owners of a company going through the fourth largest bankruptcy in US history. In fact, America Inc's CEO and President Barack Obama told reporters on Monday that the federal government was a 'reluctant shareholder' in GM, he had 'no interest in running GM' and 'the federal government will refrain from exercising its rights as shareholders on all but the most fundamental decisions'.

In any case, no one has been surprised that after years of losses and the recent collapse in sales, GM would file for bankruptcy protection or by the fact that the federal government ended up with ownership in the company that during its heyday in the 1950s was regarded as an integral component of a booming American economy.

Or as its former president Charles Wilson had put it: 'What was good for our country was good for General Motors, and vice versa.' Mr Wilson's dictum made some sense in the 1950s when GM was one of the country's largest employers and exporters, and was clearly instrumental in strengthening US economic productivity. These days, on the other hand, it seems that what's good for GM is not necessarily very good for US taxpayers who, through the federal government, will be infusing close to US$50 billion in exchange for the privilege of 60 per cent ownership in a 'New GM', a business with very murky economic prospects.

The smaller company intended to get rid of Saturn, Hummer and Saab brands, shutting down several major plants and about half of the 6,000 dealerships, and most of Pontiac (by selling the divisions where possible), and continue while closing about a dozen plants, and eliminating about 20,000 jobs. And if one takes into consideration the US federal government will share in the ownership of GM with local governments in Canada and the United Auto Workers (UAW), it wouldn't be an exaggeration to describe the New GM as a public-owned company.

And that is clearly a reality that infuriates free market critics. They warn that by taking large stakes in GM and in Chrysler as well as in several other major companies, including Citigroup, American International Group, and Fannie Mae and Freddie Mac, the US federal government is using taxpayer money to subsidise failing businesses and in the process distorting the rules of the capitalist system. It is creating public companies that would respond to pressure from politicians and interest groups as opposed to being driven by market forces.

'Obama is making us like Sweden' is the common refrain heard in Washington when conservative policy analysts meet to discuss the economy these days. But President Obama continues to insist, like he did on Monday, that the federal government is a reluctant stakeholder in automakers, insurance companies, banks and mortgage lenders, and that his administration has done that as a step of last resort that was in the public's interest, and that after reorganising these businesses and introducing new rules, they hope to get rid of their stakes and return them to private ownership.

While the public interest argument might make sense when it comes to the federal government bailing out bankrupted financial institutions (although even in this case contrarian economists raise the 'moral hazard' issue), it's not clear why owning GM and other automakers is in the public interest of US taxpayers. And it's certainly not in the interest of the average taxpayer as a shareholder, since no one seriously expects that he or she would make a profit on, or even get back, the 'loan' they made to GM.

Moreover, while Mr Obama and his aides maintain that they are infusing GM with dollars because they want to protect the money that had already been loaned by making the company more efficient and profitable, the fact is that the decision to rescue the company was based on political reasons - a response to the pressure that Detroit, including the powerful auto workers union, exerts on the Democratic Party and its representatives in Washington.

At the same time, the Obama administration, reflecting its ideological priorities, is pressing GM to make smaller and more efficient cars which the company will not be able to do unless the president and Congress decide to impose high taxes on gasoline. And everyone knows that that will not happen any time soon for political reasons.

Ironically, as the US government is taking ownership stakes in another American company, the centre-right government in Sweden is beginning to sell off state-owned pharmacies, one of the country's few remaining nationalised companies, as part of an ambitious programme of liberal economic reforms started in 2006. Perhaps the Obama administration should consider making the US more like today's Sweden.

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