Saturday, March 19, 2011

GM: An Update

When I wrote a series of blogs against the government bailout of General Motors, I never really explained the theory behind my position.  In economics, there is a separation between public and private goods.  A park is a public good.  It is built by he government for public use.  GM is a private good.  It was built by private capital for private profits. 

In the GM bailout and all through the discussion on TARP this distinction was lost.  The press never discussed the difference between a public and a private good.

GM is a private good. I love GM cars.  We have had eight of them over the years.   But GM should not have been spared the consequences of bankruptcy without government intervention, because the GM bankruptcy did not follow the normal bankruptcy procedure.  The rule for a private corporation is that reorganization under bankruptcy involving a sale of assets goes to the debtors and shareholders. 

In contrast to the normal process, the only interest group that profited from the government bailout was the union labor when this administration treated GM as a public good.  The owners of GM, namely the stockholders and bondholders, did not receive the proceeds from the dissolution of old GM that were due them.

That said, now for an update.  The government is planning to sell its remaining shares in GM, even at a loss.  The news affected the stock so much that it fell below the opening price of the original IPO shares that were put on the market a few short months ago.  The price needed in the sale of the remaining 33% of stock that the government holds is $53 and the price on Friday was almost $32. 

Also, last month GM announced a $4 billion annual profit.  Its first profit in years.  However, GM won’t have to pay tax on that profit like other corporations.   Corporations have the ability to apply past losses to current profits and reduce tax liabilities.  Normally, when a corporation goes through bankruptcy, it sacrifices this ability to carry forward past losses, but not GM.   GM can apply its past losses up to a $14 billion tax benefit.  That is lost revenue to the government during this current period of extreme deficits.  We need the money.

All of this is happening a year before the next presidential election.  Perhaps Obama wants to avoid an issue next year by selling the GM stake at a loss this year. 

Now, the final update.  One of our GM cars had built up about 109 thousand miles.  No complaints.  We loved it, but we had reached the point in a car’s life where we just didn’t know.  Would it continue to be the reliable car we knew?   Well, when the time came to answer that question, we traded.  And we traded for…a Ford.

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