Obama's Bailouts for All a Recipe for Disaster
August 17, 2012
In light of the revelation that General Motors (GM) is again teetering on the edge of bankruptcy,
President Obama’s declaration that he wants to replicate the auto bailout in “every industry” should send profitable manufacturers everywhere running for cover.
Only about one week ago, the President was stumping with this at a campaign stop in CO:
OBAMA: I said, I believe in American workers, I believe in this American industry, and now the American auto industry has come roaring back and GM’s number one again. Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry.
Forbes.com suggested that GM is on track to lose billions of dollars as the stock has lost almost 50% of its value over the past two years at the same time market share has also continued to decline, leaving the company in a perilous situation – and taxpayers holding the bag:
Right now, the federal government owns 500,000,000 shares of GM, or about 26% of the company. It would need to get about $53.00/share for these to break even on the bailout, but the stock closed at only $20.21/share on Tuesday. This left the government holding $10.1 billion worth of stock, and sitting on an unrealized loss of $16.4 billion.
Right now, the government’s GM stock is worth about 39% less than it was on November 17, 2010, when the company went public at $33.00/share. However, during the intervening time, the Dow Jones Industrial Average has risen by almost 20%, so GM shares have lost 49% of their value relative to the Dow.
GM is unlikely to hit the wall before the election, but, given current trends, the company could easily do so again before the end of a second Obama term.
In the 1960s, GM averaged a 48.3% share of the U.S. car and truck market. For the first 7 months of 2012, their market share was 18.0%, down from 20.0% for the same period in 2011. With a loss of market share comes a loss of relative cost-competitiveness. There is only so much market share that GM can lose before it would no longer have the resources to attempt to recover
This comes on the heels of a new report from the Treasury Department that says the government (aka: taxpayers) could expect to lose
more than $25 billion on the auto bailout, 15% higher than previous estimates. The DetroitNews.com article explains:
The report may still underestimate the losses. The report covers predicted losses through May 31, when GM's stock price was $22.20 a share.
On Monday, GM stock fell $0.07, or 0.3 percent, to $20.47. At that price, the government would lose another $850 million on its GM bailout.
The government still holds 500 million shares of GM stock and needs to sell them for about $53 each to recover its entire $49.5 billion bailout. At the current price, the Treasury would lose more than $16 billion on its GM bailout .
The most unsurprising part about this news? “The report may still underestimate losses.” “15% higher than its previous forecast.”
Of course it may underestimate losses. Of course previous forecasts were off. When have government forecasts been right? If we have learned anything over the past tumultuous years it is that Washington is very, very bad at math, one of the most notable examples being the persistent rewrites of the true cost of the
President’s health care plan (hint: each time the price tag goes up) and the sky-rocketing health insurance costs that were supposed to go down.
Without going into the myriad reasons why government math is so bad (lack of information, uncertain economic forecasts, bad models, static scoring, and all rest), the bottom line is that all these reasons are one of the best arguments for exactly why government shouldn’t be interfering in the private marketplace to begin with. It’s not just unconstitutional, it’s a perfect recipe for disaster.
Misery, meet company:
Not to be outdone, GM’s former partner in crime Ally Financial (aka GMAC, the former lending arm of GM) isn’t doing any better, either. Bloomberg reports:
Ally Financial Inc. ( ALLY) , the U.S.- controlled lender whose mortgage subsidiary went bankrupt, posted a second-quarter loss on costs tied to the court filing.
The loss of $898 million compares with profit of $113 million a year earlier ( ALLY), Ally said today in a statement. The core pretax loss was $753 million, Ally said. The Detroit-based company doesn’t have publicly traded shares.
Chief Executive Officer Michael Carpenter is searching for ways to repay U.S. bailouts exceeding $17 billion that left the Treasury Department with a 74 percent stake. He’s selling foreign operations to focus on auto lending in the U.S., where the firm ranked No. 1 last year, and Ally Bank, the online unit known for its ads that satirize the ethics of rival bankers.
All this comes after failing
a March Fed “stress test” for capital adequacy. And the week’s news that the U.S. Treasury has appointed two new directors to the Ally Financial board isn’t exactly getting government out of the car loan business.
Considering the Washington’s repeated failures in the business arena, be it banking, green energy or auto industries, President Obama’s bailout economics should seem more like a threat than a promise to hard working manufacturers.
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