Post by Tim Collins on Jun 1, 2009 9:27:34 GMT -7
www.newspapertree.com/opinion/3892-the-government-owns-gm-now-what
General Motors entry into bankruptcy, coming on the heels of Chrysler’s bankruptcy, and most likely preceding a slew of bankruptcy filings by companies that support the auto industry, marks a sea change in the US economy. More importantly, the manner in which GM has entered bankruptcy may have created a fundamental change in the relationship between the US Federal Government and the free market economy.
I am one of those people who believe that The American Automobile Industry is critical to our nation’s national defense and economic security. I agree that something had to be done to stave off complete collapse of the industry. I am however also a strong proponent of a quasi-free market school of economic thought. I say “quasi-free” to distinguish myself from both the proponents of the Milton Friedman school of “unrestricted free markets”, and the Karl Marx school of communist economic theory, both of which history has shown lead to more destruction than construction.
Government has a responsibility to regulate various aspects of the free market. Government has a role in defining safety requirements for products; mandating restrictions on debt and equity trading; defining solvency requirements for insurance companies; in short, the role of the government in regulating the market is to attempt to restrain actions that would cause great harm to the citizens the government represents.
The role the Executive Branch of the Federal Government (and make no mistake about it, this has been directed almost entirely by The Executive Branch) has taken in “bailing out” the auto industry has changed the very nature of the relationship between government and the free market. The government has moved from a regulatory role to an ownership role. This is a game changer without a doubt.
The Executive Branch has taken an equity (ownership) stake in GM that it has financed by public debt. Had the government simply extended a loan to (in other words become another debt holder in) GM, they would have simply increased the debt burden of GM. So an estimated $50 billion dollar equity stake (stock) was taken, now valued at 60% ownership in the company when it reemerges from bankruptcy. Clearly such a percentage of ownership puts the government in the driver’s seat, and raises some interesting questions. Such as:
1. By purchasing the equity stake with funds borrowed by the treasury – is the US Government declaring itself above margin rules of the Federal reserve Board, NASD and NY Stock Exchange? This of course assumes the Treasury is seen as the broker in this deal. Or is this a cash purchase since the US Government in effect is printing cash to cover the purchase?
2. By dictating the terms for the purchase of this equity stake, and fundamentally forcing current secured debt-holders to accept equity in the reorganized company equal to 10 cents on the dollar, has the Executive Branch re-written the rules of bankruptcy? What are the implications of such an action on future investment in our markets?
3. How exactly will this equity stake be accounted for in the market place? Will a new class of stock be issued within the bankruptcy process? Currently (pre bankruptcy) GM reports 611 million shares outstanding in the marketplace. How many shares will be available post bankruptcy? How will they be valued? How will they trade?
4. Assuming a rosy future for the restructured company, how will the US government (and which part of that mass bureaucracy) account for the investment gains achieved?
Will a separate fund be established by the President (and shouldn’t this really be the purview of Congress in any event) to provide transparent accounting for the use of any gains to repay the debt incurred to finance the original purchase?
What form will these investment gains take? Will the federal government receive dividend payments? Will repayment of the borrowed funds (meaning those funds the government borrowed, as GM did not borrow any now that it has been established that the Federal Government is an equity owner) be funded by sale of the new stock as the share price rises in the market?
If the proceeds will come from stock sales – how will these sales be accomplished (open market, private purchase, stock buy back by GM)? Will the Federal Government utilize an investment firm to execute these sales? If so, how will that firm be selected?
5. Is there a conflict of interest when the entity that regulates many aspects of the auto industry (from CAFÉ standards through safety requirements and all the accounting and employment laws in between) becomes the majority owner? Isn’t this conflict of interest made greater when the majority owner’s primary objective is a speedy return to profitability (in theory at least) in order to repay the debt it incurred to become a majority owner?
In my view the deed has been done. The Federal Government has become the majority stockholder in General Motors. Let us not be confused with the rhetoric that will say the American People are now the owners. In point of fact the American People were the owners already through their investments in mutual funds, retirement accounts and even direct stock and bond ownership. The Federal Government is now the majority owner. Do not expect to be receiving any proxies for your vote for the board of directors at any time in the near future. Debating if this was the right course is a waste of all our time and is probably a question that can only be answered with the 20/20 hindsight that only time can provide.
What must be discussed now is the exit strategy. This is the role of Congress, and Congress must step up now to ask the questions posed and those not even thought of as yet. Congress must re-assert its role in the process. In the panic of the moment created by this “economic crisis”, Congress has through its acquiescence forced the Executive Branch to take action, and it did. Now it is time for Congress to reassert its constitutionally appointed role in the process.
Of course, for an exit strategy to be a priority one must assume that the government wants to exit its new role as a corporate owner. Maybe the first question to answer is – will the Federal Government, once it gets a taste of corporate ownership, be willing to give it up?
General Motors – Under New Management
General Motors entry into bankruptcy, coming on the heels of Chrysler’s bankruptcy, and most likely preceding a slew of bankruptcy filings by companies that support the auto industry, marks a sea change in the US economy. More importantly, the manner in which GM has entered bankruptcy may have created a fundamental change in the relationship between the US Federal Government and the free market economy.
I am one of those people who believe that The American Automobile Industry is critical to our nation’s national defense and economic security. I agree that something had to be done to stave off complete collapse of the industry. I am however also a strong proponent of a quasi-free market school of economic thought. I say “quasi-free” to distinguish myself from both the proponents of the Milton Friedman school of “unrestricted free markets”, and the Karl Marx school of communist economic theory, both of which history has shown lead to more destruction than construction.
Government has a responsibility to regulate various aspects of the free market. Government has a role in defining safety requirements for products; mandating restrictions on debt and equity trading; defining solvency requirements for insurance companies; in short, the role of the government in regulating the market is to attempt to restrain actions that would cause great harm to the citizens the government represents.
The role the Executive Branch of the Federal Government (and make no mistake about it, this has been directed almost entirely by The Executive Branch) has taken in “bailing out” the auto industry has changed the very nature of the relationship between government and the free market. The government has moved from a regulatory role to an ownership role. This is a game changer without a doubt.
The Executive Branch has taken an equity (ownership) stake in GM that it has financed by public debt. Had the government simply extended a loan to (in other words become another debt holder in) GM, they would have simply increased the debt burden of GM. So an estimated $50 billion dollar equity stake (stock) was taken, now valued at 60% ownership in the company when it reemerges from bankruptcy. Clearly such a percentage of ownership puts the government in the driver’s seat, and raises some interesting questions. Such as:
1. By purchasing the equity stake with funds borrowed by the treasury – is the US Government declaring itself above margin rules of the Federal reserve Board, NASD and NY Stock Exchange? This of course assumes the Treasury is seen as the broker in this deal. Or is this a cash purchase since the US Government in effect is printing cash to cover the purchase?
2. By dictating the terms for the purchase of this equity stake, and fundamentally forcing current secured debt-holders to accept equity in the reorganized company equal to 10 cents on the dollar, has the Executive Branch re-written the rules of bankruptcy? What are the implications of such an action on future investment in our markets?
3. How exactly will this equity stake be accounted for in the market place? Will a new class of stock be issued within the bankruptcy process? Currently (pre bankruptcy) GM reports 611 million shares outstanding in the marketplace. How many shares will be available post bankruptcy? How will they be valued? How will they trade?
4. Assuming a rosy future for the restructured company, how will the US government (and which part of that mass bureaucracy) account for the investment gains achieved?
Will a separate fund be established by the President (and shouldn’t this really be the purview of Congress in any event) to provide transparent accounting for the use of any gains to repay the debt incurred to finance the original purchase?
What form will these investment gains take? Will the federal government receive dividend payments? Will repayment of the borrowed funds (meaning those funds the government borrowed, as GM did not borrow any now that it has been established that the Federal Government is an equity owner) be funded by sale of the new stock as the share price rises in the market?
If the proceeds will come from stock sales – how will these sales be accomplished (open market, private purchase, stock buy back by GM)? Will the Federal Government utilize an investment firm to execute these sales? If so, how will that firm be selected?
5. Is there a conflict of interest when the entity that regulates many aspects of the auto industry (from CAFÉ standards through safety requirements and all the accounting and employment laws in between) becomes the majority owner? Isn’t this conflict of interest made greater when the majority owner’s primary objective is a speedy return to profitability (in theory at least) in order to repay the debt it incurred to become a majority owner?
In my view the deed has been done. The Federal Government has become the majority stockholder in General Motors. Let us not be confused with the rhetoric that will say the American People are now the owners. In point of fact the American People were the owners already through their investments in mutual funds, retirement accounts and even direct stock and bond ownership. The Federal Government is now the majority owner. Do not expect to be receiving any proxies for your vote for the board of directors at any time in the near future. Debating if this was the right course is a waste of all our time and is probably a question that can only be answered with the 20/20 hindsight that only time can provide.
What must be discussed now is the exit strategy. This is the role of Congress, and Congress must step up now to ask the questions posed and those not even thought of as yet. Congress must re-assert its role in the process. In the panic of the moment created by this “economic crisis”, Congress has through its acquiescence forced the Executive Branch to take action, and it did. Now it is time for Congress to reassert its constitutionally appointed role in the process.
Of course, for an exit strategy to be a priority one must assume that the government wants to exit its new role as a corporate owner. Maybe the first question to answer is – will the Federal Government, once it gets a taste of corporate ownership, be willing to give it up?