Obama and GM

USA or USsAr?

WASHINGTON (AP) -- President Barack Obama pushed General Motors Corp. into bankruptcy on Monday and said it was part of a "viable, achievable plan that will give this iconic company a chance to rise again."
[Why does the president has the power to push a private company into bankruptcy? Or plan for the recovery of the same company?]

Obama said he hoped the firm would emerge quickly from bankruptcy court, and said the government was ready to commit an additional $30 billion to help the company get on its feet.
[Why send $30 billion more into the whole? And at that time??]

He said the government would own 60 percent of the new GM -- much as it has taken part ownership of Chrysler, banks and other corporations in recent months -- and acknowledged that could prove controversial with some.
[USsAr]

Seeking to ease those concerns, Obama said, "What I am not doing, what I have no interest in doing, is running GM."

The president said auto executives "will call the shots and make the decisions about turning this company around." He said the government would refrain from playing a management role in all but the most critical areas.
[Yes, because they have a very good track record of doing the right thing. They have been able to do anything about it for the past many years, and I don't see how the same people would be able to now become competent all of the sudden]

"Our goal is to help GM get back on its feet ... and get out quickly," he said of the federal government.

Obama spoke as GM entered bankruptcy court at the same time Chrysler was looking to emerge after a two-month reorganization. Over the weekend, a bankruptcy judge gave the No. 3 automaker approval to sell most of its assets to Italy's Fiat, part of a plan under which the U.S. government will own somewhat less than 10 percent of the firm.

Ford Motor Co., the other large U.S. automaker, has said it can weather the current economic and industry crises on its own.

Under the GM plan envisioned by Obama's auto industry task force, the federal government will wind up with 60 percent ownership in the one-time pillar of American capitalism.

That comes in addition to its smaller stake in Chrysler, as well as significant interests in banks, insurance giant AIG and two mortgage industry giants, Fannie Mae and Freddie Mac.

Speaking at the White House, where he was flanked by Cabinet secretaries and economic advisers, Obama said the coming restructuring will "take a painful toll on many Americans" with the closure of additional plants and the loss of jobs.

The president did not pause to answer questions, but Republicans had plenty.

"The only thing it makes clear is that the government is firmly in the business of running companies using taxpayer dollars," said House Republican Leader John Boehner of Ohio.

"Does anyone really believe that politicians and bureaucrats in Washington can successfully steer a multinational corporation to economic viability? It's time for the administration to fully explain what the exit strategy is to get the U.S. government out of the board room once and for all," Boehner said.

Obama cited Chrysler's experience in bankruptcy court as a model of how GM could fare.

"Some said a quick bankruptcy was impossible ... they were wrong," he said.

He added that unnamed critics predicted car sales would "fall off a cliff," and added, "they were wrong." Chrysler sold more cars in May than it did in April.
[Obviously, he's lying. If he's not, he might just be insane]

The outcome, he said, is "dramatically better than the one we found when we began."

Looking ahead, he said, GM will be prodded at every juncture by the administration's top officials.

The announcement marked the latest step in a series of measures Obama has taken since he became president to salvage an industry that has been part of the American landscape for a century.

Earlier in the year, he rejected a restructuring plan submitted by GM's ownership, and ordered its leaders to try again. They did, under the direction of administration officials, and the result is a blueprint in which hundreds of dealerships will be closed and familiar model names jettisoned. Officials have estimated the new GM should be profitable at a level of 10 million vehicle sales a year. The company that entered bankruptcy court had to sell an estimated 16 million units to make a profit.
[10 million a year is still a huge number, specially in the current economic environment and when you produce car that nobody actually want]

Obama stressed that GM's workers and its investors had both made sacrifices. The United Autoworkers Union agreed in recent days to numerous concessions, and a majority of investors agreed to accept less than the paper value of their holdings. The administration, sensitive to charges that it favored the UAW, said the terms accepted by the unions were harsher than what had been proposed by the Bush administration.

NEW YORK (AP) -- General Motors CEO Fritz Henderson says the new GM will be a leaner and quicker company that's more focused on its customers and its products.
[Yes, because he has a very good track record of doing the right thing. They have been able to do anything about it for the past many years, and I don't see how the same people would be able to now become competent all of the sudden]

Henderson spoke Monday at a news conference in New York after the fallen icon of American industry filed for bankruptcy protection. President Barack Obama says it is part of a "viable achievable plan" that will give the company "a chance to rise again."

Henderson says the new GM will be built from the strongest parts of its business, including its best brands and best products.
[Obviously, if you believe in fairy tales... I can't do much for you]

The company plans to focus on four core brands -- Chevrolet, Buick, Cadillac and GMC -- and get rid of four others -- Pontiac, Saturn, Hummer and Saab.

Cerberus err... GMAC Receives $7.5 Billion in Federal Funds

May 22 (Bloomberg) -- GMAC LLC received $7.5 billion from the U.S. Treasury to expand auto lending at Chrysler LLC and was cleared to sell government-backed debt for the first time.

The investment includes $4 billion for GMAC to originate loans to Chrysler buyers and sellers, the Treasury said yesterday in a statement. The remaining $3.5 billion will help Detroit-based GMAC meet capital needs that resulted from the government stress tests. The Treasury said it expects to hold a 35.4 percent common equity interest in the company.

The second capital infusion brings the government’s investment in GMAC to $13.5 billion. It signals the Obama administration’s commitment to secure financing for customers and dealers of General Motors Corp. and Chrysler, two of the country’s three biggest automakers. [...]
[My comment: It signals the Obama's administration commitment to bail out at any cost their friends in Cerberus Capital Management, with USD-barer money]

[...] Separately, GMAC can now sell $7.4 billion in debt backed by the Federal Deposit Insurance Corp., the company said in a statement. GMAC also said it received an exemption from the Federal Reserve to allow its bank to originate a limited amount of GM-related retail and wholesale assets.
[My comment: we are back in the far west: no rules, no laws. Government bodies (FDIC and the Fed) allow anything to happen, as long as money is transferred from the USD barer to the private hand of the banksters]

Previously unable to sell debt because of a junk rating, GMAC was permitted to convert into a bank holding company in December to tap the Treasury’s rescue fund and attract more retail deposits. [...]
[My comment: we are back in the far west: no rules, no laws. Government bodies (the Fed) allow anything to happen, as long as money is transferred from the USD barer to the private hand of the banksters]

[...] GMAC’s bonds have jumped 83 percent since the Chrysler deal was signed on optimism the government won’t let the company fail. [...]
[My comment: It signals the Obama's administration commitment to bail out at any cost their friends in Cerberus Capital Management, with USD-barer money]

[...] Senator Richard Shelby, an Alabama Republican, said that continuously pumping money into the automakers and finance companies is delaying recovery in the industry and has been a bad investment for U.S. taxpayers.
[My comment: It signals the Obama's administration commitment to bail out at any cost their friends in Cerberus Capital Management, with USD-barer money]

Some background information is required to understand what is going on here. The central point is a private equity firm named Cerberus and comes from Wikipedia:

• Cerberus Capital Management, L.P. is one of the largest private equity investment firms in the United States. The firm is based in New York City, and run by 49-year-old financier Steve Feinberg. Former U.S. Vice President Dan Quayle has been a prominent Cerberus spokesperson and runs one of its international units.
• On October 19, 2006, John W. Snow, President George W. Bush's second United States Secretary of the Treasury, was named chairman of Cerberus.
• In 2007, Cerberus and about 100 other investors purchased an 80% stake in Chrysler for $7.4 billion, promising to bolster the auto maker’s performance by operating as an independent company. In 2008, the plan collapsed [...]
• On March 30, 2009, it was announced that Cerberus Capital Management will lose its equity stake and ownership in Chrysler as a condition of the Treasury Department’s bailout deal, but Cerberus will maintain a controlling stake in Chrysler’s financing arm, Chrysler Financial.
• Chrysler Financial refused to take $750 million in TARP government bailout aid because executives didn't want to abide by executive-pay limits, and because the firm doesn't necessarily need the money.^[8]
• Cerberus acquired 51 percent of GMAC, General Motors' finance arm, in 2006 for $7.4 billion.
• The company had previously said it may fail in its quest to become a bank holding company because it lacks adequate capital.^[15]
• On December 29, 2008, the U.S. Treasury gave GMAC $5 billion from its $700 billion Troubled Asset Relief Program (TARP).
• In January 2009, the Federal Reserve granted GMAC bank holding company status, so it could get access to the bailout money.^[17]

So it looks like the well connected and incompetent people of Cerberus managed to get whatever they wanted from the corrupt and incompetent people of the US government. And there will be probably more money to come down the road

Saving the auto-industry in the US

A couple of reports this week-end on Bloomberg start to make people realize that there's more than bottomless hole for the US Government to throw money: there's the financial industry, the housing industry which is now really some sort of hedge-fund industry with Freddie and Fannie being in the middle and finally, the 3rd place on the podium: the auto-industry.

March 19 (Bloomberg) -- U.S. auto suppliers will get as much as $5 billion in U.S. Treasury aid to avoid a collapse that would cripple the domestic industry, including federally funded General Motors Corp. and Chrysler LLC.
[...]
“This is not going to save every supplier because there is still a significant amount of overcapacity, but if we can protect those suppliers that are in this situation because of the difficult market environment, that’s the key,” said Wall, the CSM analyst.

Senator Carl Levin, a Michigan Democrat, called Treasury’s action “good news,” saying a strong supplier base is critical to maintaining a domestic auto industry.
[...]
GM and Chrysler, which are operating on $17.4 billion in government loans, are seeking as much as $21.6 billion in additional aid.

March 21 (Bloomberg) -- General Motors Corp. and Chrysler LLC may need “considerably” more than the $21.6 billion in aid they requested, which was based on optimistic recovery plans, said Steven Rattner, the Treasury’s chief auto adviser.

President Barack Obama’s auto task force is assessing proposals from GM and Chrysler to decide whether to recommend U.S. assistance or tip the carmakers into bankruptcy. Rattner made the comments yesterday on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

I would to emphasize these facts:

• US automakers have been consistently losing money for the past 5-6 years, while the economy was "booming". How do you expect that a single injection of money will avoid the collapse?
• US automakers have been unable to produce cars that people actually want to buy, for the past 5-6 years. Capitalism, Darwinism, expects these companies to just shut down. But yet again, even if you give them money, how do you expect them to be able to reverse course within a couple of months while they have failed to so for many years in a row?
• US automakers are now burning government funds instead of their own personal money (and that of the shareholders). So what is the incentive for them here? What do they have to lose? This is the very definition of the planed economy that was tried in USSR. We all the know what happened to them, because it's history, and we all know what will happen to the US carmakers, because it's never different this time.
  
• Not so many people in the mainstream media dared to say that the auto-makers would come back and ask for more money, but many non-Keynesian bloggers did....
  

Finally, I wanted to share this quote with you — just try to guess what X represents:

The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores, and local motion picture theaters will lose business and depression will spread in ever-widening circles. But if industry X by prompt action of Congress is saved — ah then! it will buy equipment from other industries ; more men will be employed; they will give more business to the butchers, bakers, and neon-light makers and then it is prosperity that will spread in ever-widening circles.

Economics in One Lesson, Henry Hazlitt, 1946. Henry Hazlitt is a great economist of the Austrian School of Economics and has written this great yet very simple book which I recommend to everybody wanting to understand the way of thinking in Austrian Economics.

Here's an excerpt from the conclusion:

But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as industry X has expanded. The result is also that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.

You can buy the book for $12 at the Mises.org institute, read it online here. I've also found an old scanned version here.