Via the Economist (here subtitled: An apology is due to Barack Obama: his takeover of GM could have gone horribly wrong, but it has not):

AMERICANS expect much from their president, but they do not think he should run car companies. Fortunately, Barack Obama agrees. This week the American government moved closer to getting rid of its stake in General Motors (GM) when the recently ex-bankrupt firm filed to offer its shares once more to the public…

Which sounds nice in theory, but in reality, the US Treasury through pressure by the Obama administration spent $50 billion dollars to own 61% of the shares.  With roughly 500 million shares available, this means the US government current owns 305 million shares.  At the current stock price today of .375 dollars, their 50 billion dollar investment is worth roughly 115 million dollars.

So even if a theoretical IPO that generates excitement were to happen, in order for the government to recoup $50 billion dollars the stock price will have to increase to $163 dollars a share or by more than 400 times it’s current price.

But of course when it’s not your money you lost, but taxpayers money, I guess that changes the calculus….

The Economist continues:

…Many people thought this bail-out (and a smaller one involving Chrysler, an even sicker firm) unwise. Governments have historically been lousy stewards of industry. Lovers of free markets (including The Economist) feared that Mr Obama might use GM as a political tool: perhaps favouring the unions who donate to Democrats or forcing the firm to build smaller, greener cars than consumers want to buy….

& here’s where it gets more confusing.  After stating the obvious concerns one would normally have when any business starts making decisions based upon politics instead of what’s best for the company (& also what they are legally bound to do, their fiduciary responsibility), they tell us those fears are wrong:

…Mr Obama has been tough from the start. GM had to promise to slim down dramatically—cutting jobs, shuttering factories and shedding brands—to win its lifeline. The firm was forced to declare bankruptcy. Shareholders were wiped out. Top managers were swept aside….

While simultaneously explaining to us how they did in fact make tons of political decisions:

Unions did win some special favours: when Chrysler was divided among its creditors, for example, a union health fund did far better than secured bondholders whose claims should have been senior….

DA posted about how the Obama administration used their leverage and power to bend the law to help the Unions over other creditors who should’ve legally be first in line for any monies (here).

But of course, that wasn’t the only political meddling in GM (the Economist):

Congress has put pressure on GM to build new models in America rather than Asia, and to keep open dealerships in certain electoral districts. But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends….

Then why does the Economist think it’s a good idea?

[President Obama] his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold….

& there we have it.  So long as there wasn’t a huge amount of political intervention and there’s a possibility that the government might recoup all their money…. Thing are good for The Economist.

Of course “good” is being defined by potential future results.  The truth is, the US government buying up private businesses creates far more implications that whether the stock prices rise enough to recoup the money they were given.

Enter Harvard Law School on Corporate Governance and Financial Regulation.  Instead of asserting some win based upon theoretical future value, they asked the more important question (here):

In our paper When the Government Is the Controlling Shareholder, recently made publicly available on SSRN, we analyze the ways in which existing corporate law structures of accountability change when the government is the controlling shareholder, and the extent to which federal “public law” structures substitute for displaced state “private law” norms.

& the implications are vast.  In their full research paper (here), they ask a much more serious and long term question.  Which is, what rights do other shareholders have when the government owns a controlling interest and is forcing companies to make decisions that will not benefit shareholders in the long term?

Normally, shareholders have legal rights at the state level where officers of any company are held legally liable to their fiduciary responsibility:

In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a “caretaker” of another’s rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest.” The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary’s interests as well the duty not to favor ANYONE ELSE’S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals….

What this is for, is so shareholders can be protected.  If a company you own shares in decides to willfully make decisions which are counter to this responsibility, shareholders can sue for compensatory damages.

But what if the main decision maker is the federal government?  Even though the Economist seems to be ok with this, though recent history shows this is an incredibly naive position to take (from the full report):

Even though government investment started less than three years ago, there are already troubling anecdotes….

For instance, after the government purchased 71% of AIG and AIG gave 165 million dollars in bonuses which were contractually guaranteed, the “owners” responded with threats.  Senators and Congressmembers bemoaned this.  Told us it was unethical for AIG to follow their contractual obligations because the government owns them.  Even President Obama:

….urged Congress to draft legislation that sends “a strong signal to the executives who run these firms that such compensation will not be tolerated.”

As if Senators, Congressmen, and the President have any idea what pay should be in the first place… (DA post here), but they went further (from the full report):

Barney Frank, chairman of the House Financial Services Committee pushed the idea of suing AIG….

Since they have majority ownership:

[Barney Frank] “I still believe that we have a right legally to recover this, because we can assert our ownership rights and say, yes, you may have a contractual right to a bonus but your rotten performance means you should forfeit it”…

Additionally:

…”senior Treasury officials have been meeting several times a week all spring to review, one by one, the payments to the company’s executives. But the time-consuming discussions have never been resolved whether any of the executives should get paid.”  Now, even routine bonuses are pre-cleared with Kenneth Feinberg, the “compensation czar.”

& what of the bank bailouts?

…bailout recipients faced mounting pressure from the President and Congress to increase lending.  President Obama said he would “hold banks ‘fully accountable’ for the assistance they recieved and that they ‘will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer’”…

What about foreclosures, from people who can’t pay their mortgages?

Rep. Barney Frank “acknowledged that struggling homeowners [weren't] getting help as fast as many in Congress had hoped”, and urged bank executives to put in place a foreclosure moratorium until the government could implement mitigation programs.

These same people who also went after GM & Chrysler for closing too many dealerships.  And then there’s Citigroup, Bank of America, etc, etc, etc. (DA post here).

But this is Harvard, so they talk about ways other countries have handled this.  For instance, the UK started another government agency.  Theoretically it’s independent of politics, with a sole goal to find businesses which need to be saved and to save them.

Which of course is an entire other conversation…. why anyone believes the government can make the bad decision of buying a failing private company and solve the conflict of interest by simply building another government agency is…. well, it’s stupid.

It would be like having an entire corrupt police force arguing that the solution to the corruption is to merely hire more cops.

& therein lies the true problem.  When the press, politicians, and us normal voters, refuse to look into the future to see the true implications of such actions, we end up with answers like “since our [government's] original plan didn’t work, it must only be because we didn’t go far enough.”

I would submit to those willing to critically contemplate, that the decision itself was wrong & all these implications were obvious, known, and serve as further proof that politics and business don’t mix.

More importantly however, they fail in their analysis on a fundamental level.  True critical thinking can never rely on results as proof of anything.  Because it’s always possible to make a bad decision, and have positive results in spite of it.  It’s also completely possible that you make the most perfect decision ever, but it still fails.

So no – the question isn’t really whether the government made a good investment, whether taxpayers will actually recoup the $50 billion spent, or whether GM ultimately succeeds in the long run.

The question should be- should we have done it regardless of the answer to any of those questions?

& I would proffer the answer is easy: no.  The long range implications of such dangerous behavior isn’t worth saving one single car company.

Of course, that’s just my two synapses firing…. they could always be misfiring

]]> http://detailedabstractions.com/2010/08/26/should-the-us-government-own-government-motors-i-mean-gm/feed/ 0 http://detailedabstractions.com/2010/08/18/2010-campaign-slogan-no-we-cant/?utm_source=rss&utm_medium=rss&utm_campaign=2010-campaign-slogan-no-we-cant http://detailedabstractions.com/2010/08/18/2010-campaign-slogan-no-we-cant/#comments Wed, 18 Aug 2010 18:02:09 +0000 Michael S. Langston http://detailedabstractions.com/?p=1201 The campaign is in full gear, each side trying their best to paint the other side as evil itself…. enter the President (here via Politico):

MENOMONEE FALLS, Wis. – President Obama, playing off the slogan of his 2008 campaign, mocked Republicans Monday as the party of “No, we can’t” and skewered Senate Minority Leader Mitch McConnell for saying he wishes the GOP “had been able to obstruct more” of Democrats’ agenda.

“Obstruct more? Is that even possible?” Obama said with a laugh during a fundraiser for Tom Barrett, Democratic gubernatorial candidate in Wisconsin. “So apparently that’s their plan for the future: ‘No we can’t.’ Clean energy: ‘No we can’t.’ Health care: ‘No we can’t.’ Wall Street reform: ‘No we can’t.’ ”…

First, I’ve written about this before (here).  The short version is just by using critical thinking one should come to the conclusion that obstruction isn’t necessarily a bad thing.  It depends upon what is being obstructed and why.

But honestly, this whole stupid argument just needs to die.

The facts are:  We have a President whose own party controls the Whitehouse, Congress, & the Senate….

Yet it’s someone else’s fault they are unable to manage being the party in power.

It would be as if Microsoft’s CEO went on TV to give an interview and complained that it was AOL’s fault they lacked success.

With all due respect Mr. President, a prior president set some precedent with the phrase “The buck stops here.”  Maybe it’s time to start contemplating that more seriously.

& with upcoming elections, for which Democrats currently seem to be in some trouble (polling data here via RealClearPolitics), they will continue this regardless of any true facts which show the opposite.  This week, with some gall, they plan to use the auto show in Detroit (here via Policito):

When the president travels to Michigan on Friday, he’ll tout the revival of General Motors and Chrysler since the auto companies received billions in federal aid and government-assisted bankruptcies….

I say with gall, because they fully intend to tout even more success with blown money when the only major car company to NOT take bail out money is doing better than their rivals (here via Star-Tribune):

DEARBORN, Mich. – Four years ago, Ford mortgaged everything down to the blue oval logo to save itself. Now, even as Americans remain skittish about the economy, it’s reaping big rewards and stealing business from stumbling rivals.

Ford said Friday that it made $2.6 billion from April through June, its fifth straight quarterly profit. The company, which reported record losses in 2008, now predicts it will end 2011 with more cash than debt.

With its two longtime Detroit rivals still finding their way after spending time in bankruptcy last year, Ford, which never took government bailout money, extended its success story…..

Yep, instead of using this time to stand up for the ingenuity, the self reliance, the perseverance of private individuals working without taking tax money, they will use this to tell us all how much better off we are than if they hadn’t.

Oh… and in case you might be one of those people who know about Ford’s success, they have an answer for that as well (here via Detroit News):

Washington — The Senate’s top Democrat argued Ford Motor Co. probably would have collapsed if the government hadn’t bailed out its top two competitors….

So there you have it, even with logical evidence to the contrary, not only did the all knowing government help out two companies that are still barely surviving, but also completely fixed a company for which they contributed nothing directly.

Well, the verdict is in.

Please make no mistake about it, this marketing push isn’t really about obstruction, but about the upcoming elections.  Just as President Clinton did brilliantly prior the 1996 elections when he cast all Republicans as following Newt Gingrich and obstructing spending laws, the Obama administration is moving forward in much the same pattern.

This is possible because the White House, regardless of occupant, has historically been able to control the news cycle.  In my opinion, this should be an indictment on journalism as a whole when alternatives which exist aren’t being reported, but simply put:  when the President talks, news happens.  When your normal representative talks, you’re lucky if you even hear about it.

It worked during the Clinton Administration on spending, it worked during the Bush (43) Administration on the Patriot Act, & it certainly might work again this time. Irregardless, the campaign is back and in high gear (here via USA Today):

…”Too often, the Republican leadership in the United States Senate chooses to filibuster our recovery and obstruct our progress,” Obama said. “And that has very real consequences.”…

Or here via NY Times blog, here via WaPo, & on and on and on…

From a critical point of view however, obstructionist should not automatically be a pejorative.   Without analyzing what exactly is being obstructed, this is little more than name calling.

As an example, if say in the 1940s Congress was actively trying to “obstruct” the intermittent of thousands of innocent Japanese-Americans, this would not only be a moral good, but any thoughts to compromise solely to be seen as a non-obstructionist would be wrong.  What would be a compromised alternative?  House arrest?

Additionally, we have to be on the lookout for the differences between the marketing of bills and their actual language.  Think of the new health care legislation.  President Obama’s promises of more health care for all at cheaper prices, simply don’t seem to be fulfilled by the 2500 page law passed… or maybe they are being fulfilled, but like the Patriot Act, no one really knows what the new legislation actually means (here via Cato):

…The Patient Protection and Affordable Care Act represents the most significant transformation of the American health care system since Medicare and Medicaid. It will fundamentally change nearly every aspect of health care, from insurance to the final delivery of care.

The length and complexity of the legislation, combined with a debate that often generated more heat than light, has led to massive confusion about the law’s likely impact….

Or on yesterday’s Meet The Press Rep. Van Hollen stated (transcripts here via MSNBC):

…The frustration is there are lots of important bills to push for jobs that are sitting over in the Senate.  But it’s not the fault of the Democratic leadership in the Senate.  I mean, frankly, you know, John Cornyn and his allies have been trying to block a whole lot of very important jobs measures.  We in fact sent a piece of legislation over very recently that would remove these perverse tax incentives to ship American jobs overseas, that give American corporations a bonus if they ship American jobs overseas….

Just like health care, the basic idea that our representatives are working on private job creation incentives is a good one.  But just like the Obama Administration’s promises on health care, Rep. Van Hollen is selling us a job creation bill which has little chance of actually creating jobs.

To translate – what they mean by “removing incentives” is to increase taxes on businesses who outsource.  Now, some may want this to happen for various reasons, but the economics are pretty straight forward.  Tax increases have never increased jobs & forcing a tax such as this could actually result in companies simply moving their head quarters as well.

To be fair, there are bills I don’t believe the Republicans should block, for instance the extension on unemployment benefits (though it seems likely to pass soon: here via The Hill).

Yes, the point isn’t that the Republicans are doing the right thing and the Democrats are failing at every single step, the point is only intended to remind us of the old saying about representative governance:

The people will get the government they deserve.

& so long as we allow marketing campaigns to have more force in elections than critical analysis does, we will likely continue to be disappointed.

For such a prestigious and life long appointment, we should expect much better (via Cato here):

Elena Kagan, President Obama’s nominee for the Supreme Court, seemed to shock many people when she dodged questions about the Declaration of Independence during her testimony before the Senate Judiciary Committee…

DA posts here & here

Via Freakanomics here, which will hopefully put to rest the idea that nurses go on strike to “help” patients, from the NBER paper:

…Controlling for hospital-specific heterogeneity, patient demographics and disease severity, the results show that nurses’ strikes increase in-hospital mortality by 19.4% and 30-day readmission by 6.5% for patients admitted during a strike, with little change in patient demographics, disease severity or treatment intensity….

Robert Reich via Salon.com here demonstrates once again how much politics effects his economic analysis.  According to him, this whole economic mess, including a potential backslide can be blamed solely on deregulation:

…starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets…

Which he believes is causing greater wage disparities:

…We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground….

Because with deregulation, of course, companies can become EVIL:

…Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles)….

I submit what Mr. Reich fears is freedom – freedom of business owners to hire and fire as they wish, freedom of employees to change jobs easily (401K allows this, pension does not), just freedom.

Secondarily, you can see in his writing that the only thing the government has ever done wrong, is by not getting involved enough.  He doesn’t mention government meddling, deficit spending, enormous new health care expenses, entirely new federal agencies which more money will be needed, idiotic regulations like a moratorium on all oil drilling due to one company’s failure….

Nope, for Mr. Reich, it’s all because the government hasn’t taken enough control over the little people.

Via Cato here, more news on the Obama Administration’s transparency:

The Social Security’s trustees’ annual report is, by law, supposed to be published by April 1. This year, however, the trustees have postponed its release indefinitely. The program’s financial condition continues to remain hidden from public view — and by many accounts will continue to be so until the end of the fiscal year….

Wonder if Reich views this as an issue?