The GM Reorg and The Government

The acquisition of stock "could" be a better move than what Posner claims. Here is what he overlooks.
1) With control of the stock, the Government can boot out the board of directors and present leadership using the rights gained by stock ownership. If the US does not own the stock, then what leverage does the government have for all the money spent on GM?
2) Transfering back GM ownership to the private sector has a mechanism already in place....sell the stock on the stock market. Any other mechanism will be uglier and possibly quite corrupt.

His third comment about "invest in GM" confuses me. The money is already spent (rightly or wrongly) as a national investment.

 

Seems I recall a certain anti-Prius, GM dealership member claiming the sky would fall, the country would collapse, if GM went Tango Uniform.

It does look almost certain GM is going to declare Chapter 11 on Monday.

Anybody want to take bets that the sky will fall, and the country will collapse, when that happens? I'm not worried

 

Whatever happens, it's a pretty clear indication of the
hand-in-glove-ness of government, big corporations, and big
oil. You don't see such a big foofaraw over the various
wind and solar companies that have gone belly-up recently, right?
.
_H*

 

Maybe I am missing your point, but I don't see Government control of the board and leadership as a good thing. Our 535 automotive engineers in Congress wouldn't have a clue about best to run an automaker, they're the same body who largely made the whole mortgage/credit/financial meltdown possible. You want them to do the same for domestic automakers? Simply forcing them to make smaller more fuel efficient cars isn't the answer.

 

To clarify, It is a very bad thing to have the government run a business, especially for an extended time. My point was that stock ownership provided the mechanism for the government to quickly return it to the private sector. It also allowed the government to do the one thing really needed, replace the defective leadership(......but not replace it with even worse government appointed political types).

What is worrysome about the government running the auto corporations is not only the inevitable bad business decisions, but a new government motivation to start making trade and business legislation to "assist" the business they now own.

 

When the Present of the United States can show displeasure with the CEO of a public corporation and the Board of that corporation fires him the next day, it is obvious that the Government (or at least the Executive Branch) is ALREADY in control of the company. This is something no group of shareholders has shown to have the power to do in the past. As a Management Scientist I find this shocking, if not Unconstitutional.

During the Great Depression, President Roosevelt pushed through the National Recovery Act (or NRA, not to be confused with anything to do with guns). "The NRA allowed industries to create "codes of fair competition," which were intended to reduce "destructive competition" and to help workers by setting minimum wages and maximum weekly hours. It also allowed industry heads to collectively set price floors.

In 1935, the U.S. Supreme Court unanimously declared in Schechter Poultry Corp. v. United States 295 U.S. 495 (1935) that the NRA was unconstitutional, ruling that it infringed the separation of powers under the United States Constitution. The NRA quickly stopped operations, but many of its labor provisions reappeared in the National Labor Relations Act (Wagner Act), passed later the same year" (National Recovery Administration, 2009).

If the provisions of the NRA were Unconstitutional (and all it did was attempt to interfere with competition) what will government take-over of a major US Corporation through forced bankruptcy (to allow the government to pick up the assets through "purchasing" stock at a discount) be considered?

I can see Ford lawyers lining up to slap this all the way to the Supreme Court once it happens (unfortunately nothing can be done ahead of time - the way our system works they have to wait until this Unconstitutional act is actually perpetrated, possibly ruining yet more hundreds of thousands of people's retirement savings in the process). How can Ford compete against a State Run, Government funded car company? How can ANY car company compete against this?

We live in frightening times, indeed (and I would say this no matter who was president or which party tried to pull this stunt).

Reference:

National Recovery Administration. (2009). Retrieved May 30, 2009 from National Recovery Administration - Wikipedia, the free encyclopedia

 

The only way the Country will collapse is the amount of money our Government is spending. Super Inflation? Yep, It's coming very soon.

GM won't make America collapse.

 

Will the bankruptcy break the unions?
Or does it merely transfer to the taxpayer what GM management calls the unsustainable burden of wages, pensions, and healthcare?

 

What is happening with Chysler and GM is small potatos to the bizarre money giveaway of the TARP program. We need to keep that in perspective when the "loss of good money" complaints of financing the auto companies get more attention than the complete disappearance of much larger sums that nobody can explain is occuring elsewhere.

It's not all that clear that the present course is that bad....yet. The government has made two decisions. The first is a short term decision to not let cash flow shortages cause GM and Chrysler to implode with all the economic ripple effects. The second decision is to require Chapter 11 bankruptcy instead of some "TARP like adhoc government life support nonsense". Both of these are sensible short term pragmatic decisions. The execution of the restructuring is where the long term success or failure is cast.

Note that with bankruptcy, the executive branch actually has a lot less control than many realize. A judge will be making many of the crucial restructuring decision, not the executive branch. If GM and Chrysler can get good management in place (the real solution), then Chapter 11 is a proven, legal method of recovery.

 

Keep in mind GM took government money (your tax dollars) with the understanding that the government money has strings attached.

If the government starts dictating to companies that received no government funds (such as Ford), then you got something unconstitutional going on. I haven't seen the government do that.

Would you rather that GM took your tax dollars with no strings attached?

Speaking as a taxpayer, I would not.

 

I would already say the UAW has been broken. The UAW has agreed to:

• Massive layoffs and plant closures
• ~40% reduction in compensation
• 2 tier pay system were new workers start at $13 / hour instead of $22
• Ban on strikes until 2015
• Conversion of Billion of dollars owed their healthcare trust to GM stock.

EDIT: The UAW's "unsustainable pension and healthcare obligations" have been transfered to the UAW. Their trust fund is responsible for retiree benefits and the majority of that trust fund has been transfered from dollars to GM stock. So the future of GM's retiree's depends on the future of GM. If GM was to liquidate, GM's pension obligations would transfer to the Federal Government. However due to the very low caps on compensation from the US Pension Insurance, retirees would be lucky to get 20-30% of their current pension. EDIT

I like the idea of the government taking stock in exchange for money given to companies. I see it as the best way to insure that the taxpayer actually gets their money back. I agree with FL_Prius_Driver that selling stock is a very easy way for the government to move GM back to the private sector.

I also agree that the GM is being handled better than the banks. GM makes a physical and tangible product. Banks borrow money from the Fed and loan it to the private sector at higher rates. Banks are much easier to replace than manufacturing.

 

There's obviously more going on in the banking industry than came out in the news. I've heard little (even in radical conspiracy theorist web sites) about what is really going on.

Re: GM - what worries me isn't the government's involvement in the restructuring, but the government buying up controlling interest in a public corporation. It has been proven to be Unconstitutional before, so there is no reason to believe it will be legal this time around.

Once the government purchases controlling interest in GM (after "forcing" the bankruptcy that will plunge stock prices to allow the buy-out) then we will see something Unconstitutional. I don't disagree that taxpayer money should have strings attached. Read up on how the loans to Chrysler under Iacocca were carried out. There were written stipulations going in. With GM, there were no well spelled out conditions.

I happen to agree with David E. Davis in this month's Car & Driver: Wagner was no saint, but he was moving GM in the right direction for the first time in years. I'm not sure what the administration had against him, but I doubt they have the managerial skills in auto manufacturing to make such a decision in an informed manner.

 

GM had no forward direction, they were asked to present a plan to show how they were going to clean up their act, and they failed to present that, I don't know about you, but if I was a stockowner, guess what I am, I would be pissed that management couldn't do that.

For once we have a president that is semi looking after us the taxpayers. And guess what, the government of Japan subsidizes their auto manufactures, so stop pretending that that doesn't happen elsewhere.

This was simply GM screwing up, they should have gone bankrupt 20 or 30 years ago, they lasted this long by a miracle, but they have terrible management, and they needed to be forced into reality, they accepted government money, they deal with us as majority stockowners. When the New and Improved GM comes back, we sell the stock and hopefully make a profit, then the company goes private again.

 

GM didn't "force" GM into bankruptcy. Bush gave GM money with no strings attached. When Obama gave GM money at the end of March GM was clearly told that they had until June 1st to reach certain restructuring goals or they would not get any more money. Those goals were not met so GM goes bankrupt. If a private individual had been willing to give GM money they could have avoided bankruptcy.

Your supreme court case does not apply to GM. There is a huge difference between price fixing and the government taking over a company.

 

Wow, Lets see here, Cap & Trade, National Sales tax, Socialized medical.... Yeah, He's a real savior to the tax payers.

You have your head so far up your rear end you can see yourself chewing.

 

What JSH said. GM was not and is not being forced into chapter 11.
Far from it, they would have been liquidated Jan 1 if the government had not given them bail-out money last December.

 

If government intervention can actually turn GM to a profitable status and the government acquire shares in GM for their investment in GM now, then the tax payer should make a profit from the investment when the government sell the shares. However, if the company still falls over the tax payer loses, which they will anyway if it falls over and the money is in the form of a loan.

 

Actually, your point may become valid if the government mishandles the situation. Presently, the government is not so much "buying up a controlling interest" but implementing a mechanism to ensure that the "operations continuation" money provided actually buys something. If the government sticks to it's responsibility and unloads GM once the bankruptcy has been processed, then there is not much of a legal problem. If the government holds on trying to "optimize" the running of the business, then your worry has become valid.

While Wagner was starting to get a clue, it's the entire corporate culture that needs rebooted for any chance of recovery. Wagner may have been moving GM in the right direction at the end, but that was due to the process of elimination. (How many corners did GM cut before figuring out that cutting all corners results in a car nobody will buy.)

 

Well, let's hear YOUR solution, then. Don't be shy to use lots of calculus, I can follow it

The messes with domestic car companies imploding, massive foreclosures, formerly trusted SEC/Wall Street insider running a massive Ponzi scheme, out of control credit spending, the laughable "war on drugs," etc, took a long time to play out.

Interestingly enough, while these various criminal schemes played out, Administrations from both sides of the aisle were running things. Do not insult my intelligence by claiming such epic massive frauds could be pulled off without at least tacit knowledge from the Powers To Be

Almost as side-splitting funny as how TARP was rushed through, and *nobody* thought to prevent the very crooks who caused the mess, from cashing in on it. When it comes to payoffs, it seems if you spread enough scratch around, then nothing bad happens