GM 'bailout'

Posted by Zotta Rendevouz

Yesterday the GM IPO was fairly successful with the stock increasing in value from its opening. Just a few weeks ago the company was considering selling its shares at $26 per share, at the end of the day yesterday the closing price was above $34. After all the numbers are calculated the IPO will likely either be the biggest or second-biggest in history. The government was able to sell off two-thirds of its stock in the company allowing taxpayers to recuperate much of the money put in to GM. GM is now no longer “government motors” as the federal government now only owns a minority stake in the corporation. Contrary to the Republican predictions that the GM “bailout” would lead to continual government dependence, the government has now cut lose its majority stake after just one year.

More importantly, the “bailout” of GM saved millions of government jobs. Contrary to the claims of many conservatives, if GM had failed and gone into bankruptcy it likely would not have been able to recover with private funding. It would have made more fiscal sense for investment banks to simply shred the company and sell of its assets. If GM had been allowed to fail it would have sent ripple effects across the rest of the economy. For instance, dealerships and car parts manufacturers would have also went out of business. One conservative estimate states that the GM collapse would have cost the American economy over 3 million jobs. Instead, as President Obama said his statement yesterday, the car industry has now created 700,000 jobs over the last year. GM has posted strong profits over the last two quarters and most investors (as evidenced by the successful IPO) believe that the company has bright future ahead.

The survival of GM was also important for other reasons. During WWII the car manufacturing industry played a crucial role in the nation defense. Car factories were quickly converted to make engines for tanks and airplanes. The massive factories used to mass produce the materials needed for war cannot be built in a few months. The infrastructure of the car industry continually stands at the ready if we were, God forbid, ever to find ourselves in another large-scale conventional war. If companies like GM were allowed to die, America would be left to depend on countries like Japan and China to mass produce in a large-scale conflict. That dependence would be very dangerous, particularly if our enemy was China.

Finally, it is important to note that the “bailout” of GM was not truly a bailout. The money was lent to GM, not given. As evidenced by the IPO, the government received stock in exchange for its investment. Some of that investment has already been returned. Even if the government does not sell of any of its remaining shares GM will still be required to pay back much of the “bailout” through separate payments.

Conservatives counter by arguing that the GM “bailout” sets a dangerous precedent, and encourages future bad behavior. That theory assumes that it would be worth losing 3 million jobs simply to “teach GM a lesson” by letting them fail. The conservative argument also assumes that executives, like those at GM before its failure, somehow can predict a government bailout. Lehman Brothers certainly did not receive a government bailout. Even GM, which received government assistance, certainly suffered for it. Many of the executives at GM were let go in the process of restructuring. It is dubious whether any company’s executives are saying “let’s let our business fail so that we can go through what GM just went through.” It benefits every business to avoid the kind of “bailout” GM received.