The way BO is going, we will end up with three classes of people. The wealthy power elite, the wealthy criminal elite and the poor. After all that is what socialism always creates.
I would not buy stock directly in any company that is at the mercy of an unreasonable union.

I agree. I’m not blaming the new GM. I believe that the new GM: With government intervention, a government steering committee, and Congressional interference regarding new product development is an entirely different animal that the GM that would have emerged from a straight bankruptcy.

We’ll never know what form that company would have taken. It very well could have been a liquidation and ceased to exist. The difficulty I have is with the distortion such government interference creates.

My concern is the mis-allocation of capital present in the government structured bankruptcies of both GM and Chrysler. Austrian economics teaches that the market allocates capital to the ‘most’ effective use. Think of it as a jungle. The rule is adapt or die. In a company where the business model is capable of this, the company thrives. Stock prices go up, the balance sheet is in order, and the P&L is positive. GM, by all accounts, has been sick for quite some time; hemorrhaging both cash and market share.

If you believe that the administration’s motives are altruistic; then the bailouts and other subsequent government meddling is intended to ‘save’ GM. A cynic may decide that an administration, not wanting to waste a crisis, saw an opportunity to dictate policy in so many areas (spread the wealth, shared sacrifice, social justice, and complete control of a major manufacturing concern) that this added up to an opportunity to good to pass up.

Whatever their intention; the effect was to continue to mis-allocate capital that should have been directed to a more healthy concern. I may own a Chevrolet, but I’m not married to the company.

Government intervention has made a bad situation worse. The original Chrysler Corporation Loan Guarantee act of 1979 was a failure. According to a 1983 Heritage Foundation article; “Chrysler renegotiated its debts and restructured its organization in a way that greatly resembled a company going through Chapter 11 bankruptcy. Its creditors, like those of bankrupt firms, were forced to swallow sizeable losses.” The entire article may be found here; http://www.heritage.org/research/regulation/bg276.cfm

All the original government intervention allowed was for a dying company (Chrysler) to limp along for another three decades. If Chrysler had been allowed to fail in 1980; there can be no doubt that the UAW and the industry as a whole would have learned some valuable lessons 30 years ago that may have avoided all that has happened recently. Mis-allocation distorts the market.

Now we face exactly the same conditions. Government has lent money to two automobile manufacturers. However; this time they’ve taken majority ownership, dictated which entities would receive what compensation regardless of established law, and put a bureaucratic committee in place to oversee their future development. After experiencing the government’s success in managing passenger rail (read Amtrak); what would lead one to believe that a government sojourn into the auto industry would be any more profitable?

The original question posed by Jack Ward’s essay was “Would you invest in the new GM?” My response is; “I don’t have a choice, the government has purchased shares for me! But that doesn’t mean I have to like it!” This is WRONG on so many levels.

Thanks for the discussion Pat. See you out there!

If you were to build an econometric model just for the auto industry (they already exist and are used by all the major auto companies) you would discover that once market share is lost it is extremely difficult to gain back. This is because, like it or not, there is a measure of brand loyalty that shows up in the population. That loyalty translates fiercely when someone has changed brands that they previously showed a strong preference for into a strong preference for the new brand. Couple this preference with a perception of higher quality and better products and you have the beginning of a perfect storm.

Chrysler recovered from an almost identical situation, under Lee Iacocca, by developing a innovative new product the mini-van (not really new but if buyers believe it is a new product it is a new product).

So what is different today in the new Government Motors and Fiat/Chrysler? Ownership is government and union, and lenders have been brutalized to the extent the entire economy may be affected since first mortgage notes are not worth the paper they are written on.

Who will innovate? Government? Union? To use the texting example LMAO!

The other companies will innovate and, unless captive customers are created, Government Motors and Fiat/Chrysler will die with the exception of two brands: Chevrolet and Jeep. Why only those two? Government in its zeal to move the population to roller skates will destroy the Cadillac segment of the market leaving only specialty and brand. Chevrolet for the brand and Jeep for brand and specialty.

Doubt this? Look at history and try not to repeat it.

Regarding the stock market, folks often misunderstand what the market actually does. Theoretically, it is intended to support raising capital through sale of equities. But, in reality, it is much more than that. Large public corporations issue stock each and every month but large sales of new shares are relatively rare. However, stock as compensation is quite common; both at the senior management and low level employee level (and usually the reason for issuing new shares out of the corporate treasury). Without a market to trade shares for cash or other stocks, stock compensation loses all power to motivate employees.

Additionally, the stock market is a form of legalized gambling, although we pretend otherwise. Short sales, puts, calls, all the other gimmicks aren’t necessary to public corporations to raise capital through equity, but are very necessary to create the risk element and betting mechanisms necessary to support the gambling aspect of the market. We claim that such disguised gambling supports a healthy market function, but in reality that is patently absurd.

Speculators on Wall St. may not agree with the New GM on moral grounds but it won’t stop them from making a future profit trading in New GM shares. You’re correct that private lenders and investors should think twice before trusting New GM, that lesson has become blatantly obvious after recent events, but that doesn’t mean that there isn’t a future profit to be made trading in New GM shares. How could it be otherwise given the speculative and gambling aspects of the market?

Like many commenters on this site and others, there is a tendency to blame business for willfully violating moral principles. However, holding business accountable as if it was a seperate entity, independent and unaffected by govt., is a mistake. A contractor can cheat you on a home improvement project, an internet vendor can sell shoddy merchandise and so forth but there are legal remedies available, business can’t ignore such remedies at will, nor can business ignore the legal and physical force behind those remedies. Our government, on the other hand, is accountable to no one – it’s a force unto itself.

To illustrate, assume for a moment that GM had repudiated Obama, and earlier the Bush Administration, by refusing any government assistance and declaring they would take their chances in a normal bankruptcy process. Now ask yourself if that would have been the end of it? Legally, and with encouragement from the Justice Dept., stockholders could have raised a lawsuit requiring GM to accept a Govt. bailout. The UAW could have asked for intervention citing national interest, contract violations regarding their pension fund payments, etc. Do you believe the Govt. would have simply backed off and told the complaintants to solve it on their own?

America is a land of business but Americans are hopelessly naive about how business actually operates. Rather than rant on for pages, let me cite a few simple examples. International businesses must obey the laws in each country they do business in, moral principles, ethics and right conduct nonwithstanding. A firm operating in Saudi Arabia must treat its female employees under the strictures of Saudi law, even when those actions would get them sued and fined in the States. Many countries have laws that are in oppostion to American law.

Business shouldn’t knowingly hire illegal workers but what does a grove owner do when it’s time to bring in the crop? The govt. won’t protect our borders and depending on which way the political winds are currently blowing will round-up illegals one day and ignore them entirely the next day. So the grove or orchard owner goes out of business to support the law while the govt. ignores the laws it has responsibility to enforce.

A late term abortion provider can become wealthy but a business buying from countries that employ child labor is subject to legal penalties. So, legal to kill a child able to live outside the womb, illegal to buy merchandise from a country engaging in certain forms of child labor and which is under stricture by the State Dept. Which entity, business or government, has the moral myopia?

A media organization sends its reporters into a war zone or hostile area, the employees are killed, kidnapped or otherwise harmed and nothing is done about violating the law on the part of the employer. A refinery is heavily fined, sued and could face criminal prosecution if it doesn’t enforce certain safety regulations affecting employees. What’s the basic difference between the two industries in respect to safeguarding employee safety?

Business exists and operates entirely at the whim of the govt. and under the changing winds of current politics. Blaming New GM is an exercise in futility.

If you’ll pardon my presumption to know your mind, there currently exists a captive market of which you thoroughly aprpove and, after decades, hasn’t set off a global trade war. The sellers have names like Northrup-Grumman, Sikorsky, Hughes, Boeing, Lockheed and so forth. The captive buyer is of course the U.S. Govt., specifically the Defense Dept. procuring next generation military aircraft. The sellers kept from servicing this buyer have names like Dassault, Saab,Airbus, Mitsubishi, Sukhoi, MIG, etc. We not only direct business to these favored companies, we also generate requests for weapon systems we don’t currently need to provide these companies with a balanced revenue stream in order to keep them in business.

If you will recall, replacing the Air Force tanker fleet recently was hotly debated because the Defense folks were willing to consider a foreign aircraft supplier. But no global trade war was initiated and all the players, foreign and domestic, agree with this captive buyer arrangement – nor will it change anytime soon.

So, Obama must be careful not to attempt a captive buyer arrangement but he definitely must attempt the two improvements I specified. Increasing consumer spending on cars and light trucks isn’t adequate, he must increase unit volume sales of new cars and light trucks. The current market for used cars is increasing as buyers perceive the economic value in used cars, but the UAW workers don’t make “used cars”.

He must also restore the pricing structure within the American automotive market. Assuming GM and Chrysler (as well as Ford) have regained a quality level comparable to the Japanese and Germans, then the destructive purchase rebates must go away. Yet, once retail consumers expect constant “sales” or “markdowns” before they will consider buying, the habit is a hard one to break. A purchase rebate paid from taxpayer funds gives GM and Chrysler a chance to recover from the “rebate” mindset.

If you’re assuming that Obama can create a taxpayer funded rebate structure that favors only GM and Chrysler, I believe your conclusions are erroneous. But if Obama can restore GM’s and Chrysler’s pricing structure to the point where they make a unit profit on each sale, he is well on his way to creating viable companies that won’t require perpetual govt. assistance. If Ford, Toyota and Volkswagen also benefit from these rebates, that also serves his purpose toward increased consumer spending on new cars and “stimulating” the economy (hint: Ford, Toyota and Volkswagen have plants within America employing only American workers).

Previous internet searches on GM dealerships yielded less than stellar results. However; that being said, the number of closings is not in dispute. These are still ‘market contact points’. Reducing this number by 20% as opposed to my original estimate still places the new GM at significant disadvantage. I think we must still address the fact these independently owned dealerships have quite an amount of capital tied up in inventory, service parts, buildings, property, etc. Apparently these people are in the same boat as the secured bondholders; expected to ‘take one for the team’; so that more favored groups may continue to be made whole.

The UAW now owns a 39% stake in GM http://www.businessweek.com/autos/autobeat/archives/2009/05/chrysler_gm_and.html but the bondholders (secured creditors) received $2.7 billion in equity from the ‘new’ GM in return for their $27.2 billion in secured debt. Granted that 39% of GM today is worth next to nothing, but a GM that approaches even what it was worth in 2004 that would amount to $55 per share. We’ve still not explored the reasoning behind the administration forcing a change to established bankruptcy law to place the UAW ahead of these bondholders. I’m certain that I need not cover over 100 years of ‘Stare Decisis’, which validates the point I made in the last paragraph of my original post which asks;

“It does cause one to wonder how such arrangements will lead to economic recovery. If banks are wholly owned subsidiaries of government, and are told who to lend and who not to lend to. If auto makers are told who to fire, who to retain, and what to produce. If the courts are told who to pay and who to screw, what person in his right mind would place his hard earned money into any company?”

This would seem to invalidate the assumptions you make in paragraphs four and six of your latest post. Despite what you may believe; the NYSE is not a stock market but it is a market of stocks. While there are large institutionalized investors, there are numerous smaller investors also. Holders of company common stock under the previous rules were third in line; only able to receive value after all secured and unsecured creditors had been made whole. http://jalopnik.com/5286402/gm-reminds-investors-its-stocks-completely-worthless Under those circumstances; why would you expect any investor, institutionalized or personal, to want to risk his own or his clients’ money on a company the government has taken over once already? Especially when they see the likelihood of any payback based upon historical performance.

I feel I gave a condescending response to your original posting regarding the Hybrid Volt. I must admit to a bit of frustration that one would believe the future of an automobile manufacturing company would rest on such a product. I realize that the hybrid vehicle is a necessary step in the evolution of personal transportation; it is not be ‘be-all-and-end-all’ of the process. I would personally expect most personal transportation to be hydrogen powered within two generations. But I do not believe the hybrids will fill that forty year gap.

While I realize that the administration’s appointed Automobile Task Force may actually push GM in this direction, it’s not a surprising result seen as how none of the members of this body has any automotive industry experience and only three of them have ever owned a car.

The conventional wisdom is that GM’s major issue was building cars nobody wanted; and hybrids are another example of that mistake. Your point regarding the number of trucks you count in your metro area is well taken. I’m certain that there is a significant amount of what we call ‘Air Haulers’. But your own observation serves to validate mine.

My ranch is small, 25 acres, and for me it is a ‘second job’. I commute 85 miles each way to work every day. Unlike California, here you have to go where the money is. My home is 5 miles from the nearest traveled road, 20 miles from the next small town. 40 miles from the Interstate, and 65 miles from the closest major metropolitan area. That commute equals a 180 mile round trip each day. How will the Chevy Volt assist me? It doesn’t have that kind of range. Added to that is the reality that a rechargeable electric car doesn’t alleviate pollution, it just changes the point of emission. The stuff that no longer exits the tailpipe, exits the stack of the power plant providing the current for recharge.

Your original post reveals that government force would most probably have to be utilized to assist GM’s climb to re-profitability. “Cash for Clunkers”, CAFÉ standards, Treasury rebates, artificially inflated gas prices, and “gas hog” penalties are all examples of government force. It doesn’t matter if the fist is wearing velvet or chain mail, force is force.

This is just another example of favoring one group of people over another. I’ve personally been amazed at how each and every program this administration has instituted in order to help ‘working families’ has managed to miss my family entirely. Tuition assistance; sorry kids are already grown and gone. Housing assistance; mine’s paid for. Health care; already have it. Tax breaks; well they’ve not gone up yet but have not lessened either: And yes, I write the government a check each year, and have for the last twenty or so.

All this leads me to state the following; the federal government made a monumental error buying into GM. As a matter of principle, I think any company that was short sighted enough to be caught in the financial maelstrom should have been allowed to fail. Whenever government injects capital into institutions they are choosing to reward institutions that the market would punish. A lost job is a lost job. Saving UAW jobs and pensions at the expense of independent dealers’ and bondholder jobs and pensions is nothing more than blatant favoritism.

Once again I refer to my above quoted paragraph in my original post and ask; How does this lead to economic recovery? And what person in his right mind would invest in any company knowing in advance that the government could step in at any time, and make your investment worthless?

Looking forward to your response