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Washington Occupies Detroit

Posted By James Gattuso On April 28, 2009 @ 2:26 pm In Economics | Comments Disabled

Congratulations. If you are a U.S. taxpayer, you will soon be a part owner of a car company. Under the latest reorganization plan released by General Motors, Uncle Sam would take ownership of 50 percent of the challenged automaker in return for forgiveness of $10 billion of debt now owed to the Treasury. The deal would give Washington controlling ownership of a major industrial corporation for the first time since Conrail [1] was sold in 1986. And the first time the U.S. has ever owned an automaker — joining China and several European governments in that club. In fact, as one industry analyst put it [2]: “They are going to control more of GM than the government of Lower Saxony owns of Volkswagen or France owns in Renault.”

Word of nationalization came as General Motors made otherwise welcome moves toward streamlining its operations — announcing that it would drop four moribund brands, including Pontiac, and cutting back it workforce and bloated dealer network. It also offered bondholders 10 percent of the reorganized firm in exchange for cancellation of debt, as well as equity to the UAW in exchange for health coverage claims.

But, while these moves grabbed headlines yesterday, they actually didn’t move anything down the road much. The cutbacks were long anticipated — smart Pontiac dealers started looking for alternative work months ago. And the paltry offer to bondholders — at a fraction of what the Feds and the UAW got — looks almost certaintly to be refused. Because of that, GM is still looking at a probable bankruptcy.

Frankly, even word of nationalization doesn’t change much in the short term. Ever since Rick Wagoner was unceremoniously dumped by the White House a few weeks ago, GM has been run from Washington. Sure, there are quibbles about the degree of control — but its inconceivable that GM will make any substantial decision inconsistent with White House policy.

The stock acquisition formalized this existing control. Far more dangerously, however, it turns that control — which had been based on temporary loans, into an indefinite ownership stake.

In other words, it looks like Detroit is in for a long-term occupation by Washington. That’s bad news for all of us.


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URL to article: http://blog.heritage.org/2009/04/28/washington-occupies-detroit/

URLs in this post:

[1] Conrail: http://www.heritage.org/Research/SmartGrowth/bu25.cfm

[2] put it: http://www.bloomberg.com/apps/news?pid=20601103&sid=afZWYG7joTRU&refer=us

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