Of cars and ditches

Government Motors should be sold immediately for whatever price we can get

There’s a story Obama liked to tell on the campaign trail: Republicans drive a car into a ditch, and then hand the keys to Democrats. Democrats work and work to get the car out of the ditch while Republicans sun themselves. Then, once Democrats finally get the car out of the ditch, there’s a tap on their shoulder: it’s the Republicans, and they want the keys back. The car is the economy. Or the nation. And there are Slurpees involved, I think. But the moral of the story is that you shouldn’t give the car keys to Republicans, else they’ll run us all into a ditch.

Great story. But I’ve got a better one. General Motors drives a car into a ditch. Then they go to Democrats, and sell them the now worthless car as if it were new. The Democrats get down into the ditch and start pimping it out. They buy it a fresh coat of paint. They put on some spinning rims. They install a TV. And as they stand over the ravine, grinning imbecilically at the broken wreckage below, they get a tap on their shoulder. It’s the Republicans; they want the credit card back. Like Obama’s story, mine has a simple moral: if you’d left the credit card with Republicans, they wouldn’t have bought a totaled car in the first place.

On November 18th, the New General Motors made an initial public offering, (IPO) and the U.S. government took advantage of the occasion to sell a little less than half of its 60.8 percent stake in the company. The price of the stock was about a third less of what was necessary for the government to break even on the deal, and there is virtually zero expectation that the price will rise enough to return the taxpayer money that was spent buying the company... yet Obama used the occasion to sound a triumphant “I told you so” to the legions of economists who had said he was crazy to purchase the bankrupt car company in the first place.

It’s not the first time that Democrats have tried to spin news about GM. Back in April of this year, you may remember Democrats dancing as the CEO of Old GM, Ed Whitacre, proudly told the Wall Street Journal: “We’re paying back — in full, with interest, years ahead of schedule — loans made to help fund the new GM.”

At the time, observers wondered how GM, which had lost 4.3 billion dollars in the second half of 2009, could pay off its debt to the government.

In reality, GM hadn’t really lessened its debt to the U.S. government at all — the reason they “paid off” the loan was that if they did so, they would then be eligible to tap into $13.4 billion dollars of “working capital” that the government had offered to loan it. They weren’t paying back the loan — they were doubling the size of it.

And of course, this obscures the fact that most of the financial assistance the government gave was not given in the form of loans, but as a direct investment. Using TARP funds intended for the banking sector, the Obama Administration has actually committed $82 billion to the U.S. automotive sector, of which they are still expected to lose an estimated $15 to 34 billion.

Even this amount understates the money that the government has sunk into fixing GM. As part of the restructuring process, GM debt holders legally should have had first claim on the company’s assets. Instead, Obama all but wiped them out and divvied up their property between the federal government and the auto unions, giving the U.S. government a 61 percent stake in the new GM, unions a 20 percent stake, and the Canadian government an 11.7 percent stake (our friends from the north loaned $1.4 billion to GM and gave another $8.1b in direct funds). The poor schmucks who should have owned GM now have less than a 9 percent share, and will never be made whole.

Even after stealing such a huge amount from bondholders, the U.S. government is still set to clear a loss on the whole ordeal. It’s clear the markets continue to think GM is a lemon: their bonds are rated as junk. It’s likely the only reason the IPO got as high a price as it did was because the market believes the government will act as a stop-loss — if GM turns up another few billion in losses next quarter, an embarrassed Uncle Sam will be there to give them more money.

Despite these losses, and the risk of future losses, perhaps there are some in government who would rather hold on to the car company forever. After all, such a thing can be politically useful, as Rep. Barney Frank demonstrated when he placed a phone call to Washington and got GM to reverse its decision to lay off some employees from his district.

And it’s not just autoworkers whose votes can now be bought under the guise of economic recovery. Government Motors has been the wet dream of many an environmentalist — finally, they can force car makers to go green without having to futz around with clunky regulations. The Thomas Friedman types must also be ecstatic — haven’t they long believed that the key to improving American “competitiveness” is to put a gun to an automaker’s head and tell him to produce hybrid cars?

If there is one high point in this nightmare, it has to be the 2011 Chevy Volt. By giving the Tom Friedmans of this world a car company of their own, we’ve been given a chance to see what kind of monstrosity they would create. GM’s new hybrid car does not disappoint.

The Volt is an expensive car. Its base price is $41,000, but it shares its platform with the $17,000 Chevy Cruze. In terms of features, it is the equivalent of a $20,000 gas-powered vehicle.

As an electric car, it is inferior in nearly every regard to the Nissan Leaf, which will retail at $33,000. Even with the government offering a $7500 subsidy to Volt buyers, it is hard to see the Volt being sold in large numbers, which might be good, given some estimates that say even at $41,000, the Volt is being sold at a loss.

GM hopes to market the car in California, where hybrid cars are highly treasured. Californians however will discover, as one consumer review company did, that the Volt has an interesting “feature.” Edmunds found that the Chevy Volt required 39 kilowatt-hours to travel 100 miles, but only 3.22 gallons of gasoline to travel the same distance. In California, where electricity prices are $0.34 per kWh, and gas prices are $3.11 per gallon, this means it is cheaper for Volt owners to run their car on gasoline than electricity. The disparity is so large that it would take a 45 cent tax on gasoline to reach parity. To put that in perspective, that would be the equivalent of slapping a $51-per-ton-of-CO2 tax on carbon emissions, an amount that is well in excess of the carbon prices charged by countries with cap-and-trade regulations.

We put a gun to GM’s head. We told them to make a hybrid car. But even if we taxed carbon as Europe does, and Obama pulled an Oprah and gave the Chevy Volt to every person in California, they would still choose to run the car on gas.

Government Motors indeed. Only Obama could look at this ditch-stuck car and be petulant when the American people ask him to give it back.