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04 June 2009

Government Motors or Despot Motors

The federal government has put about $20 billion into General Motors and plans to put in another $30 billion in the bankruptcy settlement. It will consequently own 60% of GM according to plan. Canada will own 12%, the United Auto Workers Union will have 17.5%, and the cheated bondholders will have to settle for 10% ownership. If the federal government is to come out of this restructuring of GM without losing taxpayer money, its 60% ownership will require that GM be worth $83.33 billion at some future date. And this neglects the fact that the taxpayer is not made whole unless the government investment earns interest over that time. More realistically, the taxpayer ought to get at least 6% real interest on his investment. So, in three years, GM needs to have a market value of $99.25 billion, or $83.33 billion compounded annually 3 times. Of course, it is more likely to be compounded monthly, with a result of at least $100 billion then likely.

What is the likelihood that GM will be worth $100 billion in 3 years? Well, surely we are all laughing at that question. GM is going to be managed directly from the White House, by the Despot-in-Chief Obama. He has no commercial enterprise management experience worth noting. His motivation in action is most certainly only political and does not include any concern for the taxpayer recovering his money, let alone with appropriate interest. The UAW can and will make demands for concessions before the next presidential election and the Despot will grant many of those demands. He will also mandate further small vehicles be built, which Americans will not want to buy. He will require GM to spend further huge sums on impractical power systems for cars and trucks. Americans will not buy these very expensive and impractical vehicles. Management will be afraid to make decisions for fear of stepping on the Despot's toes or what is the same thing, for fear of stepping on the UAW's toes. A shareholder with 17.5% of company shares is usually someone of power and they certainly are when the Despot holds 60% of shares and is allied with the 17.5% shareholder.

So, both management and labor union members will pretend to work in the best socialist tradition. This is a road much traveled and well-known. It is why nationalized companies in the U. S., in Great Britain, and in France, not to mention in the USSR and the post-WWII eastern Europe, have never worked. In the U.S., we have the well-known examples of the U.S. Post Office and Amtrak.

Despot Motors will lose the taxpayer's investment. The taxpayer will be very lucky to get out of this investment with $10 billion of the $50 billion committed or to be committed. That will only happen if the Despot does not win re-election and the in-coming President immediately sells GM for whatever it is worth on the market at that time. It is more likely that Obama the Despot will milk still more money out of the taxpayer for GM. At the least, we can expect an edict that all future federal government vehicle purchases or leases will be from GM at inflated prices. Most likely, there will simply be further grants of money as GM will be losing money hand over fist. No, Despot Motors will be squirting blood at least 10 feet.

It has been speculated that no one will want to buy from Ford Motor Company because the government will be doing favors for Despot Motors. Frankly, if Ford Motor does manage to stay out of bankruptcy, it will be the only game in town. The Despot will try to tilt the playing field toward GM, but he will not be able to compensate for GM's mismanagement. Meanwhile, Ford has experienced a much lower loss of sales than have the Japanese and Korean car makers, as well as lower losses than Chrysler and GM. Both Chrysler and GM will find it very difficult to get private investors to put money into them as shareholders and as lenders. Ford will have a very big advantage here. If Ford fights hard for UAW concessions, it will do even better. The UAW and federal government mandates on car mileage, size, and power systems will still be nightmare problems for Ford. Frankly, the traditional American auto industry has been milked to death and is not where any young professional would want to build a career. Go elsewhere, young man or woman. But cars will still be needed, so Ford is the only viable source for that commodity.

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