Why the government is keeping GM alive

By Felix Salmon
June 2, 2009

Robert Reich has come over all faux-naive about the GM bankruptcy and bailout:

Why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up…

It cannot be to preserve GM jobs, because the US Treasury has signaled GM must slim to get the cash. The company has only slightly more than 60,000 Americans today (83,000 around the world), and plans to shut half-a-dozen factories and sack at least 20,000 more U.S. workers this year. It has already culled its dealership network. Plans call for laying off another 18,000 U.S. workers by the end of 2010…

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganization under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars…

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM? …

GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

The key bit of misdirection here is where Reich talks about “what a reorganization under bankruptcy would do” as an alternative to the government spending $60 billion on GM. But a reorganization under bankruptcy is exactly what is going on right now — and exactly what wouldn’t be going on were it not for the government providing debtor-in-possession financing.

The alternative to the $60 billion bailout-with-bankruptcy would be outright liquidiation — and outright liquidation would cost the government even more. Remember the NYT story on Brian Deese?

A month ago, when the administration was divided over whether to support Fiat’s bid to take over much of Chrysler, it was Mr. Deese who spoke out strongly against simply letting the company go into liquidation, according to several people who were present for the debate…

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate.

If GM were to be liquidated, there would be a domino-line of supplier bankruptcies which might well have fatal repercussions even for the last bits of the US car-manufacturing industry which are reasonably healthy: the Japanese-owned car factories in the south. The wave of defaults and bankruptcies would not only set back the US auto industry and networks by decades, but would certainly spill over into municipal finance and a huge number of other areas of the US economy. The recession would get much worse, and any economic recovery would be significantly delayed.

So the point of the $60 billion isn’t to buy GM, or to provide jobs to some subset of its workers. It’s to avoid the catastrophe that would be a GM liquidation.


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How many suppliers have only GM as a customer?

There would undoubtedly be supplier layoffs, bankruptcies – very doubtful.

Posted by Marc | Report as abusive

“So the point of the $60 billion isn’t to buy GM, or to provide jobs to some subset of its workers. It’s to avoid the catastrophe that would be a GM liquidation”

I agree. But, initially at least, I thought that bailing out the automakers was a matter of optics, especially for the Bush Administration. It was beginning to look like only bankers, financiers, and Bush cronies, got bailed out. Hence, the help for homeowners and auto makers.

Now, I know all about Cerberus, but, frankly, even helping homeowners can be seen as bailing out banks and lenders. These bailouts had better optics. This also explains, in my book, the rather over the top criticism of creditors. It makes the bailout look like a defense of the little guy. Sort of.

Optics matter. It’s a bitter pill to see such posturing from my party, but I’m getting used to bitter pills.

Reich’s lack of insight here was shocking. My respect for him went down a notch.

Posted by lark | Report as abusive

If GM is voluntarily closing factories, how much are they selling those factories for? Anything?

How much would GM yield in a liquidation? There are lots of operations that if closed would have zero buyers. Would the foreign manufacturers buy up those plants because they anticipate increased production above their current capacity? Haven\’t the big3 closed other factories in MI while the foreign manufacturers have built plants, mostly in the South?

Your conclusion rightly sums it up.

Posted by winstongator | Report as abusive

I don’t see a lot of light between Reich and Salmon’s positions. I think Salmon explained the mechanism more clearly, but the end-game looks pretty much alike.

Felix, the third tier 1 supplier declared bankruptcy today. Or, perhaps I should say, “declared its intention to lapse into delinquency.”

Just out of curiosity, how many suppliers have to go bankrupt with no bailout before we (you? Mish? Anyone?) takes the administration to task for simply throwing money at banks once again. Banks are the only ones making any money in this BK. Shocking!

Posted by Unsympathetic | Report as abusive

To Marc: Supplier bankrupticies doubtful? Several suppliers are already in bankruptcy!!

Posted by Argel | Report as abusive

What about the national security angle? Wouldn’t the desire to have massive assembly line capacity outside of Ford be a consideration for the government in the off chance WWIII breaks out tomorrow?

Posted by cbl | Report as abusive