Loss From GM Bailout

Recently released reports are saying that the government lost $11.2 billion on their $49.5 billion investment in GM.  This investment came during the recession of the late 2000s, and kept General Motors from having to liquidate their company.

“‘The goal of Treasury’s investment in GM was never to make a profit, but to help save the American auto industry, and by any measure that effort was successful,’” Adam Hodge, a Treasury spokesman, said.”

This makes me wonder how the government should be involved in the American auto industry.  I understand that the auto industry is one of the most important in the country, and if we had lost one of the largest companies it would have been very detrimental to our economy as a whole, but I don’t think that the government was involved in the crisis in the right way.  I think that, while trillions of dollars in debt, the United States government was in no position to be giving out money without intentions of making anything back.  I believe that, at least in the future, if the government is going to “bail out” a company, they should do so in an attempt to earn a profit.  I believe that now, as the auto industry begins to become productive again, the government could actually benefit from having an investment in it.

I also realize that there would be a very obvious conflict of interest if the government held shares in just one company, and many might argue that no part of the auto industry should be government owned or controlled.  However, I believe that giving bail out money to General Motors represents just as much government interference in the free market, and it also added to our national debt problem.  I believe that if there is ever another situation where people think a government bail out is warranted, the Treasury either needs to make an investment with the intent of benefitting financially, or leave the struggling company to fend for itself, which would likely be the better option since most people would not support their government investing in a company that got itself to the point of default.

 

Source:

http://www.bloomberg.com/news/2014-04-30/u-s-lost-11-2-billion-on-gm-bailout-latest-tarp-report-says.html

6 comments to Loss From GM Bailout

  • Joseph Kimbell

    To me the real issue with the government bail out of GM and Chrylser is the behavior it could potentially set up in the future. During his visit, Bill Cosgrove alluded to this. I am concerned that if the automakers believe that the government will always have their backs in the bad times that they will not adequately prepare for downturns. This is the real issue with tampering with the free market in my opinion.

  • heardd16

    Government spending has been and remains a very political controversial topic, and while I tend to agree more with the fiscally conservative, there are often times when it is called for. For instance, during the Great Depression, Roosevelt authorized lots of domestic programs that called for massive amounts of government spending, and while in the very long run it may have been detrimental, it provided Americans with jobs and got many back on their feet.

  • Jier Qiu

    I agree with Joe and I think the government has better ways to spend their money. GM has been bailed out by the government for three times already. I understand there are a lot of political issues entangled within, but GM should realize that the government would eventually give it up. Who knows if GM messes up again, would Uncle Sam still save the company?

    • Bailed out three times? Forced into bankruptcy once! No creditor thought that was a bailout, it was merely that the Dept of Treasury was the only entity in the midst of the financial crisis that was able to provide DIP financing. Instead of just taking a high interest rate, Treasury insisted on a big equity stake. If the US hadn’t sold off early (politics!) we might have made money…
       
      In normal times private DIP financing is available, and GM’s problems wouldn’t lead to a great depression. Hopefully you won’t see a repeat of 2008-9 in your lifetime, at least in the US.

  • reed

    There is a time and a place for everything. Letting a company fail in isolation is completely appropriate, but when the entire economy is reeling, allowing a major corporation with links to industries throughout the economy fail is irresponsible. Its why the government eventually stepped in to protect the financial industry. Sometimes sticking to your principles to make a point is the right decision, but sometimes it isn’t. In this particular recession, I think the government made the right choice, but I agree that we the people shouldn’t be GM’s personal rainy day fund.

  • Reed is right: letting GM fail in 2009 would have pushed many major suppliers into sudden failure, and because there was no financing available – remember (OK, you freshmen were in middle school?) that there was NO financing available for most good businesses, much less risky DIP financing for firms in Chapter 11. The result would have been all auto production closing down in the US and soon thereafter much of the rest of the world (given interlinked suppliers with non-trivial amounts of parts coming from US production bases). Ford would have gone bankrupt. Without new cars, dealerships across the US would have been forced to close. With suppliers shut, even car repairs would have been problematic. So letting GM fail would have led to a Great Depression.
     
    Even on a narrow cost-benefit basis, this “loss” on shares is more than offset by lower unemployment payments, by fewer people taking early retirement [social security and medicare outlays], and by continued income tax and medicare-social security tax receipts. State and local governments benefited too, including through real estate and sales tax receipts [no production = no new car sales = no sales tax].
     
    Finally, the decision to sell was political, because no president (and no car company) wanted the relationship to continue. Misplaced ideology – the belief in free markets is a (false) religion, not supported by economic theory or empirics – is behind that. In any case, the US government accepted a lower price to get out early. GM’s shares subsequently rose, knowing there would be no huge selloff thereafter. So while investment bankers (Steve Rattner) set up the deal to maximize returns to taxpayers, politicians wouldn’t wait.
     
    Oh, and pushing companies into Chapter 11 is NOT a “bailout”!! There was one in 2008, when Bush provided no-strings-attached money. Obama did not continue that policy.

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