Let GM go Bankrupt

E.J. Dionne seems perfectly comfortable with the fact that he doesn’t understand economics—as long as the Washington Post continues to allow him to interpret economic events in a manner that comports with his political predispositions. Dionne sees GM’s recent good fortune as evidence of the propriety of government “step[ping] in when the market fails.” Dionne, like others before him, stands slack-jawed, in awe, ready and willing to buy the Brooklyn Bridge, donning narrow blinders and viewing just a narrow sliver of the world, oblivious to the fact that related events are transpiring in the other 359 degrees that surround him. Dionne is the perfect Bastiat foil.

Last week, GM reported first quarter profits of $3.2 billion—its best quarterly performance in ten years and its fifth consecutive profitable quarter. That’s good for GM (although it remains to be seen how GM performs going forward). But that is really beside the point. Dionne creates a straw man, contending that bailout critics thought that the government couldn’t resuscitate GM. But the most thoughtful criticism—my opposition to the bailout, at least—wasn’t predicated on the notion that GM couldn’t be saved by the government extinguishing debt, rewriting ownership, providing cash infusions, and underwriting sales rebates. That opposition was borne of concern that that the government would do just that. And it did.

In the process of “saving” GM (which I still contend would have survived without the intervention and the number of jobs losses in the industry would have been comparable to the job losses that occurred anyway), the government inflicted huge costs on the economy, which—rather than repeat—I cite from an earlier post. After all, my argument that IPO euphoria (from November) was misplaced is nearly identical to my argument that GM’s positive financial statement does not confer a verdict of success on the bailout.

Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers.　Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits). They would have been able to attract GM’s best engineers and line workers. They would have more money to invest in R&D and to lead the industry into the future. Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct.

The auto industry wasn’t rescued with the GM bailout.　GM was “rescued.”　By rescuing GM, the government overrode market forces, and there are significant costs to assign for that. Witness the stagnant economy with 9.6 percent unemployment. Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts? It’s more than plausible. The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.

What about the weakening of the rule of law?　Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost? How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan?　Any costs there? What about U.S. moral authority to dissuade other goverments from meddling in their markets or indulging industrial policy?　That may be costly to U.S. enterprises.　And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry.　And that suggests even more costs.

The idea that foreign car companies were lining up left and right to buy GM assets is a joke. You seem to completely forget that we had a major recession, brought on by a liquidity crisis, going on at the time

What about the weakening of the rule of law?

Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost?

How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan?

Any costs there?

What about U.S. moral authority to dissuade other goverments from meddling in their markets or indulging industrial policy?　That may be costly to U.S. enterprises.

And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry.　And that suggests even more costs.

Quote:

The idea that foreign car companies were lining up left and right to buy GM assets is a joke. You seem to completely forget that we had a major recession, brought on by a liquidity crisis, going on at the time

It would not have mattered, we told you at the time that a bankruptcy judge could have run the company for a few years until the banking system got back on its feet, in which case the assets would be getting sold right about now to better companies than GM or Chrysler will ever be.

Utter crap. GM couldn't have survived two more months without loans, which they couldn't get due to the liquidity crisis; a 'bankruptcy judge' couldn't have ran the thing for years. Certainly not without running the brand into the ground.

Quote:

Utter crap. GM couldn't have survived two more months without loans, which they couldn't get due to the liquidity crisis; a 'bankruptcy judge' couldn't have ran the thing for years. Certainly not without running the brand into the ground.

GMC still had $16 billion cash at the beginning of Nov 08, there was plenty of money in the company to continue operations if the Judge had stopped all non critical payouts, for instance stopped paying on the loans and bonds....also stopped paying into the pension and cut back on the medical payments. http://www.businessweek.com/lifestyle/content/nov2008/bw2008117_534334.htm

huh?

Stopped paying on the bonds? You mean screw the bondholders? You don't seem to realize your arguments are contradictory.

Plus, Hawk fails to realize that it WAS a Bankruptcy judge that approved the "Obama" plan.

No, Obama screwed them permanently, had the case been run according to bankruptcy law they would have had delayed payments, and still would have taken a bath, but they would have gotten much more than the few cents on the dollar that they got.

What exactly is your argument hawkeye?
Do you think bankruptcy judges normally create the plan for bankruptcy?

parados wrote:

What exactly is your argument hawkeye?
Do you think bankruptcy judges normally create the plan for bankruptcy?

Used to be they always did, now pre-packaged bankruptcy is more common but the judge can change the terms it if he thinks it should be changed . In the case of GM Obama told the courts that if the judge insisted upon any changes then the deal was off, and they would seek an emergency remedy with SCOTUS.

Do you have any evidence for this claim?

Quote:

Do you have any evidence for this claim?

Not handy, I am going by memory.

Ironically, then, the fact that there were no other prospective “purchasers” apart from the government, which allowed the government to
dictate all terms of the purchases, including the emergencies necessitating immediate sales, produced less judicial oversight and scrutiny of the
resulting value allocations rather than more. This, of course, was precisely the market defect that caused equity receivership law to evolve in the
opposite direction. Now, sadly, we apparently have simply returned to
the “bad old days.”
The pressure to approve the Chrysler and GM sales immediately, no
matter what, was immense. Moreover, while there was little regard
shown for intraclass equity amongst unsecured creditors, the sales did
carefully respect creditors’ relative interclass priority rights (with no apparent departures from absolute priority) and gave all creditors more
than they would have received in an immediate liquidation. The resulting approvals of those sales were, therefore, entirely understandable. In
the process, though, they threaten to render sub rosa plan doctrine a virtual dead letter, potentially eviscerating even the venerable absolute
priority rule.