How GM Proves the Tea Party Wrong

GM/Tea Party story updated with more information on the government's shares.

DETROIT ( TheStreet) -- What could have happened is that today, General Motors would be in the 15th month of its bankruptcy, no end in sight, with consumers shying away from its products and tens of thousands of automobile industry workers either laid off or despairing for their futures.

Instead we have an IPO that is the talk of Wall Street, loans being repaid with stock sale proceeds, an auto company that makes money at the bottom of a cycle and new products that are widely applauded.
GM

So it's a simple call. The Tea Party and its predecessors, who eschewed federal loans to GM, simply got it wrong, failing to perceive that a "bailout" can just as easily be called an "investment."

What we have is not perfect, but it's far better than what might have been.

It's not hard to find critics, though. One is Texas governor Rick Perry, elected this month to a third term, who said in a recent interview with Newsweek that the Troubled Asset Relief Program, used to fund GM, was a mistake.

"I think you allow the market to work its way through it," Perry said. "The idea that we own an automobile company today is staggering in its proportions." When his interviewer suggested that TARP saved jobs and the banking system, Perry responded: "I don't necessarily buy into the premise that somehow or another, those measures saved jobs."

His predecessor, the one who actually had to make a decision on this question, saw it differently. In his new book "Decision Points," former President George Bush writes that he decided to save GM and Chrysler because he "had to safeguard American workers and families," according to The Detroit News.

Bush said he wanted to avoid the massive economic impact of a collapse of the auto industry and did not want to saddle President-elect Barack Obama with a "mess," the newspaper reported.

In December 2008, Bush agreed to a $17.4 billion bailout for the two companies using TARP.

Let's look at a few aspects of GM today. In China, the world's biggest auto market, GM has a 14% market share and just became the first global automaker to sell two million vehicles in a year. In the third quarter, the company had an 11.5% share of the global auto market, up from 11% in the first quarter.

In the U.S., where Buick is the fastest-growing brand, it has an 18.3% share, slightly less than it had in the first quarter. Last week GM reported a $2 billion third-quarter profit and said it would be profitable for the full year -- the first time since 2004.

Scott Painter, CEO of TrueCar.com, said in an interview that the bailout was "the right thing to do," but not necessarily because of the company's financial success.

"GM is a global symbol of America and, as a result, letting GM fail would have had profound implications that have nothing to do with free market economics or good politics. Saving it was an important sign of confidence in the American system and economy," he said.

Painter argued, however, that some Tea Party criticism is valid. "I don't think the fact that GM is becoming a solvent company again and is floating its stock to the public is a sign that it was the right thing to do from an economic point of view and a good government point of view," he said. The problem, he said, is that GM's restructuring did not go far enough.

Normally in U.S. Bankruptcy Court, a bankruptcy judge has extraordinary powers to pre-empt laws established in other jurisdictions and creditors take their time to hash out issues. But in the revved-up, 40-day GM bankruptcy, the rules were different because the government was both the financier and the biggest stockholder in the new company. The government opted for speed, not perfection.

"You had some correction, but not the correction the free market would have created," Painter said. Among the remaining problems he identified: The government has not been fully repaid; the number of GM dealers has not been sufficiently reduced; and, the United Auto Workers union retains inflexible contract provisions, which give it too much say in GM's decision-making and entitle the union to health care benefits of the sort that have been wiped out in other bankruptcies.

Michelle Krebs, senior analyst at Edmunds.com, said opposing the GM bailout "sounds great on principle," but "given where we were at the time, the bailout made sense." When GM filed for bankruptcy, she said, "the government had to step in with financing, because there was no other financing available.

"The failure of GM would have had a domino effect," Krebs said. "It would have crippled the supplier base and all of the other manufacturers who build here would also have been hurt or shut down. That would have been more expensive than the bailout."

-- Written by Ted Reed in Charlotte, N.C.

>to contact the writer of this article, click here: Ted Reed

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