Treasury's Direction of the GM Bond Offer

Today's Wall Street Journal reported on the failure of GM bondholders to accept the proposed exchange rate leaving them with just 10% of the equity of the resulting firm, in sufficient numbers to constitute acceptance.

According to the article,

"the company was prohibited by the Treasury from offering these investors a larger GM stake."

Curiously, the Treasury must have then mandated the UAW's 17.5% share, and the government's retention of the remainder, in conjunction with various Canadian government and union interests.

Once again, we see the heavy hand of federal coercion, once it gets its hands on private property. Treasury quite obviously played favorites, by giving the UAW, a key political ally of the president's party, a larger share of the resulting GM than that allotted to bondholders.

More to the point, the bondholders' failure to accept the proposal sends GM into bankruptcy court, which is where it could have been way back in the fall of 2008, or sooner, had obstinate, now-departed CEO Rick Wagoner faced up to reality a year or so ago.

In the meantime, GM has consumed north of $15B of taxpayer funding, all while careening toward Chapter 11.

In decision theory terms, this makes both Wagoner's reluctance to file Chapter 11 in 2007 or 2008, and the Bush administration's decision to provide a bridge loan in late 2008, mistakes.

Since GM will ultimately land in bankruptcy court, all of that time and money was, in effect, wasted. Other people's, i.e., taxpayers, money was used to propagate a dead, value-destroying enterprise.

This was never a wise idea. Surely checks could have been written to individual hourly workers for less than the total current outlay of money to GM, since the stated concern by then-President Bush was Depression-scale unemployment, should GM have gone bankrupt.

Instead, we have government coercion in and mismanagement of a private sector firm, using taxpayer money. It's the complete opposite of Schumpeterian dynamics, which is pretty much a requirement for releasing and recycling economic resources from failing businesses to new opportunities.

By continuing to prop up dead, poorly-managed firms like Chrysler and GM, our government is impeding the efficient workings of the capitalist, free market economy which has been the hallmark of US economic success for generations.