Confusion Over GM's Imminent IPO

As I continue to catch up on Wall Street Journals from my absence two weeks ago, I have come across two nicely contrasting pieces on August 2 and 4 by, respectively, my old friend Paul Ingrassia, and Holman Jenkins, Jr.

Paul's column lauds the current administration for its part in rescuing GM, but pointedly entitled his piece Two Cheers for the Detroit Bailout. Not three.

Paul wrote,

"Others understandably feared that General Motors would become Government Motors.

But what alternative, really, did Mr. Obama have? Had GM and Chrysler collapsed and been liquidated, investors would have picked up some of the pieces. That would have taken years. Meanwhile, the parts makers that supply GM and Chrysler would have collapsed too. Those same parts makers also supply Ford, Honda, Toyota and others, whose U.S. factories would have faced havoc.

The impact on the broad U.S. economy- including the car dealers in all 50 states, advertising agencies, accounting firms, etc.- would have been somewhere between difficult and disastrous. Nobody really knows. The Detroit bailout was like changing a diaper: a dirty job that had to be done because the consequences were worse."

Really? I think not.

Back in June of last year, I wrote this post, in which I noted,

"Even my one-time friend, Paul Ingrassia, seemed to soft-pedal his opinion about the eventual outcome of the government takeover of GM. The most he would say was, in reply to a direct question, that he would not now buy the firm's equity.

Why gloss over the obvious, and ask pointless questions? Here are the facts:GM mismanaged itself into failure. Between bad political moves, inept handling of its main union, the UAW, and poor product development and pricing, it mishandled every major "stakeholder." As Ingrassia noted, GM essentially managed itself for the UAW's benefit ever since an historic strike at two Flint factories some years ago.

The management team that led GM into this mess is largely intact and in place. According to the UAW's chief, Ron Gettelfinger, his active union members have lost nothing in this bankruptcy. Thus, GM's wage costs continue to be, although lower than before, probably too high to be competitive with other, US-based auto makers in the southern US."

A few months earlier, in April, I wrote this post, in which I contended,

"By propping up GM and refusing to allow it, if necessary, to enter Chapter 11 proceedings, our government- both Congress and the administration- is merely delaying the inevitable market-clearing dissolution of failing and failed companies, the recycling of their resources a la Schumpeter's observations of eighty years ago, and the freeing up of labor to be employed in new ventures.

Government isn't the right institution to select our economy's winners and losers. For that, we have a process which we have trusted for most of our country's life- our freely-operating, private capital and consumer markets. "

Despite Paul Ingrassia's fervent defense of the federal government's actions regarding GM, there's simply no evidence that using conventional bankruptcy would have triggered a depression. People, including Paul, often confuse filing for Chapter 11 with actual liquidation.

As I wrote in at least one prior post, there was ample opportunity for Rick Wagoner or Fritz Henderson to have done so, sold off the good parts of GM to other firms, and then liquidate the remainder. If, as Paul contends, other auto makers so needed the parts makers, then I guess they'd have kept the latter in business. At no cost to taxpayers.

And taxpayers would not have been forced to coerce GM bondholders to hand over 17% of the company to the UAW in lieu of pension and other payments.

But, all this notwithstanding, as I read Holman Jenkins' piece published two days later, I felt reassured in my belief that GM, like Chrysler after Iacocca, is simply marking time before plunging into disaster once again.

First, let's be clear about what isn't happening this fall. You, the taxpayer, are not being made whole on the GM bailout. No, what's happening is that the firm is doing an IPO, reclaiming its old ticker symbol, and allowing the creation of equity for Treasury to begin selling. But it's nowhere near enough equity yet to repay the government bailout. What I believe I read this week is that the firm owes the feds about $50B, and the IPO will provide about $17B.

What's all the celebration about? Why don't we wait for the end of this dubious process, instead of cheering the opening orchestra music?

Jenkins went on to analyze VW's return to the American car market. It's going to the non-union south, of course. Bent on a low-price, high-volume strategy to add heft to its globe-girding size.

Just what GM needs, eh? Another source of excess auto production capacity on US soil, run by managers intent on gaining market share through low prices.

Jenkins wrote,

"The relentless pressure of over-capacity is not cured. The UAW monopoly remains a unique disadvantage to GM, Ford and Chrysler that doesn't apply to foreign-born competitors."

Meaning?

Don't expect a lot of bag-holding investors to queue up for GM shares down the road. Maybe some will appear patriotic and buy the IPO shares. But I don't see GM prospering anytime soon, if ever.

As I noted in a prior post, Chrysler has this image of having been successfully turned around by Lee Iacocca. But that's not true. The firm had a brief stay of execution, then, under Bob Eaton, was forced into Daimler-Benz' arms in 1999. It's been downhill again ever since.

Why should GM be any different, government bailout notwithstanding?