Last week General Motors went public. General Motors has been resurrected by a taxpayer bailout. When the company sought bankrupty protection, the US government bought the company through an infusion of $49.5 billion in cash. The company was restructured, closing Pontiac and Saturn lines and a number of dealerships. Investor shares were converted to Motors Liquidation Co (MTLQQ).
Next we saw the “cash for clunkers” program that destroyed many used cars, priming the market for more new car sales. Next, we witnessed an unprecedented amount of prime-time advertising for General Motors cars—advertising paid for with your tax dollars. This was a government subsidy aimed at eliminating competition.
Rather than being a referee, the primary role of government in a legitimate economy, the government became a player, competing with its own citizens and throwing a rigged game in favor of General Motors—actually its union. On November 24, 2010, a record 20.1 billion shares was sold in a new public offering at around $35 per share.
What happened to those most faithful GM investors who had kept their money in the old GM? Their shares—which had been placed in MTLQQ—were worthless. Who received the new stock ahead of the IPO? The General Motors Trade Union and the U.S. Treasury. One despondent investor wrote:
I’m still holding GM stock that Obama DROVE DOWN from $35.00 to 28 cents or less ! My “old” stock is now worth NOTHING ! Having purchased GM vehicles for most of my lifetime for most in my family, I can tell you I will NEVER purchase another General Motors product and will continue to advise everyone I know to avoid ‘enriching’ GM and their “Thug” Union any further. I wish Obama and his socialist supporters the absolute worst that could possibly befall them.—Response to Washington Times article
While the government lending money to private companies is generally unprincipled, the General Motors bailout was radically different from the Chrysler bailout in 1980. In 1980, under President Jimmy Carter, the government co-signed a note for $1.5 billion (a government guarantee on private loans) on the condition that Chrysler essentially restructure in a way that provided an additional $2 billion in commitments or concessions. In that deal, investors kept their shares, the government did not shell out taxpayer money (although it was on the hook), and unions and management made the largest concessions. When Chrysler recovered, faithful investor shares recovered as well. In the GM case the loyal investors were left out in the cold.
The real loser in the General Motors deal is the legitimacy of the economic system in the United States. Although there were large profits to be made from the launch of the new GM IPO, a precedent has been set whereby a government administration can confiscate the ownership of a company, reorganize it, and pay off its political supporters. The former investors were betrayed by political decree, and once betrayed, the legitimacy of the system will never be the same.
There is also no real proof that General Motors is competitive. On opening day, the government and the GM union each sold one-third of their shares. Their income came from investor speculation, much backed by American 401k plans invested in huge funds. The income did not come from profits. The systemic costs of production related to union wages and retirement plans have not been addressed, and unlike Chrysler—and more like the Russian Lada prior to 1989—a precedent was set for future bailout needs because long-term economic stability was sacrificed for immediate union concerns. And, it is expected that taxpayers will be left permanently on the hook for up to 50% of the present bailout.
In the final analysis, the American system must be reformed so that private investors take all the economic risks and government only plays the role of referee, keeping people from harming one another in by an unprincipled pursuit of happiness. In this case, the government itself became a player and was party to a theft from taxpayers and original investors. In Life, Liberty, and the Pursuit of Happiness, Version 4.0, I indicated that a constitutional amendment parallel to the separation of church and state should be passed related to the separation of economy and state. It would go like this, “government should not establish any business, or prevent the free exercise thereof.”
Of course, government’s primary role is to intervene when people steal, kill, or harm one another. This includes harm done in the name of religion or in the name of business. We are learning to intervene for example, in the sexual abuse of boys by priests, and this is as it should be. However, the GM bailout is in some ways analogous to judges joining the union and engaging in the financial abuse of investors. We need to learn from the lessons of history the necessary checks and balances that need to be put into place for the long-term stability of the society.