By mid-December 2008, GM, the world’s second largest auto manufacturer, was losi

By mid-December 2008, GM, the world’s second largest
auto manufacturer, was losing $2 billion a month. Rick
Wagoner, CEO since 2000, knew that GM did not have
enough money to survive much longer. The year 2008,
GM’s 100th anniversary, was turning out to be its worse
ever. 1 Wagoner already knew GM would end the year
with losses of about $31 billion. But that was an improvement
from 2007 when the company lost $38.7 billion, the
fourth-biggest corporate loss in history. Those losses, and
losses of $1 billion in 2006 and $10 billion in 2005, meant
that the company Wagoner led lost an astonishing $80 billion
in four years.
Wagoner was a dedicated, affable, and likable man.
In high school, he had excelled in all sports but his height
of six feet four made him a star in basketball and upon
graduation, he was secretly hoping to be a professional
basketball player. But as a freshman basketball player at
Duke University, it became clear to Wagoner that he did
not have the talent and drive to be a professional athlete.
Instead, he majored in economics and also began dating
Kathleen Kaylor whom he eventually married. After graduating
from Duke University and getting an MBA from
Harvard University, Wagoner went to work for GM. He
rapidly worked his way up through the company’s ranks
and in 2000, he was named CEO, the youngest person to
ever hold that position in the company’s history.
Wagoner blamed GM’s misfortune on a number of
factors. One of the most significant factors, he felt, was the
“Great Recession” of 2008 that had hurt the sales of all
the auto companies, particularly when the troubled banks
stopped lending money so customers could no longer
get car loans. Unfortunately, GM did not anticipate the
“credit crunch,” and by 2006, it had sold off a controlling
interest in GMAC, the previously wholly-owned finance
company that had provided cheap loans to its car buyers.
After GM sold 51 percent of GMAC to Cerberus for $7.4
billion, Cerberus refused to let GMAC continue providing
the same easy credit to GM’s customers, which turned out
to be a significant blow to GM’s sales.
Yet another problem was GM’s labor costs. In 2008,
GM was paying an average of about $70 per hour for
labor. That $70 included $30 that the worker actually
received in wages, and $40 that went to fund other labor
costs including the worker’s benefits and pension, plus
the cost of providing health care and pensions to about
432,000 GM retirees. Because GM had been operating for
100 years, the number of its retirees was much larger than
those of new car companies. Toyota, for example, was paying
about $53 per hour for labor in its U.S. manufacturing
plants, of which $30 went to the worker as wages, and $23
went to pay for the worker’s benefits and pension, but very
little for retirees since the number was relatively low. In
some of its plants, a Toyota spokesman said, it was paying
as little as $48 per hour for labor.
But perhaps the major cause of GM’s difficulties was
its self-inflicted dependence on large SUVs (sport utility
vehicles). Japanese car makers could make small and midsized
cars for less than it cost GM to make comparable
cars. To compete, GM had to lower its prices until the
profit margins on its small and mid-sized cars were vanishingly
thin. But during the 1980s, when gas was cheap,
GM discovered that large SUVs were big hits with male
customers and with couples with growing families. Moreover,
unlike its smaller car models, profit margins on its
large SUVs were hefty, as much as $10,000 to $15,000
per vehicle. As its SUV sales boomed during the 1990s,
GM expanded its line and eagerly converted many of its
plants over to the production of the lucrative big vehicles.
By 2003, the bulk of its profits were coming from SUV
sales. But when the price of gasoline gradually crept upward,
the costs of owning an SUV also increased causing
the SUV market to slow and then to decline. In 2004,
unsold SUVs started piling up at car dealerships. When
Hurricane Katrina made gasoline prices soar in 2005,
sales of SUVs eventually collapsed. Thus, GM ended
2005 with a loss of $10.4 billion. Things improved somewhat
in 2006, but then losses climbed to record levels:
$38.7 billion in 2007, and $30.9 billion in 2008. Unfortunately,
by now GM’s plants, strategic plans, research and
development programs, and its mindset, were all locked
into the production of SUVs, and it would take years to
change them.
Because of its reliance on SUVs, GM had put off investing
in the small fuel-efficient cars a gas-conscious public
had turned to in 2005. In the 1990s, GM had developed
the technology for an all-electric car, the EV1. The EV1
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THE BUSINESS SYSTEM: GOVERNMENT, MARKETS, AND INTERNATIONAL TRADE 191
was, in fact, the first mass-produced modern electric car
made by a major car company. By 1999, GM had spent
$500 million producing the EV1 and $400 million marketing
it, yet had leased only 800 vehicles. Convinced that
the car would never match the profitability of its SUVs,
the company stopped making the cars and in 2002, it repossessed
all the EV1s it had leased and phased out the
project. At the same time, both Toyota and Honda were
introducing their small hybrid electric-gas engine cars into
the United States. The hybrids turned out to be a commercial
success and, more importantly, production of the
cars allowed both Toyota and Honda to gain almost a decade
of experience in hybrid technology, while GM continued
focusing on its gas-guzzling SUVs. In a June 2006
interview published in Motor Trend, Rick Wagoner confessed
that his worst decision during his tenure at GM was
“axing the EV1 electric-car program and not putting the
right resources into hybrids.”
All of these problems had culminated in the $80 billion
loss that placed GM in the difficult situation Wagoner
knew he had to deal with in the closing weeks of 2008.
With many analysts predicting that GM would go bankrupt,
banks—which themselves were barely surviving the
worse financial crisis in decades—refused to loan the company
more money. At the rate it was running through its
cash reserves, Wagoner knew the risk of bankruptcy was
growing daily. Given the company’s dire straits, he decided
that only a government bailout could save it.
Government bailouts were not popular. In September,
2008, the George W. Bush administration asked the
U.S. Congress to pass legislation creating a $700 billion
fund called the Troubled Asset Relief Program (TARP).
A reluctant U.S. Congress approved the TARP bill which
authorized the U.S. Treasury Department to use the funds
“to purchase . . . troubled assets from any financial institution.”
The “troubled assets” were millions of mortgage
loans that banks had extended to home buyers who were
now unable to make their monthly mortgage payments,
and whose homes were worth less than their mortgages
because home prices had collapsed in early 2007. Since
the homes were worth less than their mortgage loans, the
mortgages could not be repaid in full when delinquent
homeowners sold their homes or when banks confiscated
them. Suffering huge losses, many U.S. banks were on the
verge of failing as were European banks that earlier had
taken over thousands of the now “troubled” U.S mortgages.
Many economists predicted that these widespread
bank failures would turn the deepening recession into a
global depression worse than the worldwide Great Depression
of the 1930s.
In spite of the looming financial crisis, many had
opposed the plan to bail out the banks. A hundred leading
economists signed a letter to the U.S. Congress that
said lack of “fairness” was a “fatal pitfall” of the plan
because it was “a subsidy to investors at taxpayers’ expense.
Investors who took risks to earn profits must also
bear the losses.” 2 Calling the bank bailouts “socialism
for the rich,” the Nobel prize-winning economist Joseph
Stiglitz wrote “this new form of ersatz capitalism, in
which losses are socialized and profits privatized, is
doomed to failure. Incentives are distorted [and] there
is no market discipline.” 3
Nevertheless, if U.S. banks were able to get bailout
money from Washington, perhaps GM could do the same.
So Rick Wagoner and two GM board members flew to
Washington on October 13, 2008 to meet with officials of
President George W. Bush’s administration. During the
meeting, Wagoner summarized the precarious position of
the company and asked for a loan from the TARP fund.
Bush’s people balked at the request, saying the legislation
explicitly said TARP funds were for financial institutions
so they could not be used to provide loans to car manufacturers.
Turned down by the administration, a desperate
Wagoner turned to the U.S. Congress. On November
18 and 19, he and the CEOs of Chrysler and Ford—the
two other U.S. auto companies were also going through
difficult times—came before Congressional committees
and asked for legislation authorizing government funds to
aid the auto industry. Committee members, however, became
angry, particularly when the auto executives admitted
they had not prepared plans detailing how they would
use the funds nor what changes they intended to make to
ensure they could return to profitability. In the end, the
three CEOs were told to come back in December with
detailed financial plans for their companies. In early December,
the CEOs dutifully returned to the U.S. Congress
with plans in hand and repeated their requests for financial
assistance. A few days later, both the U.S. House and
the Senate proposed legislation to aid the auto companies.
Unfortunately, while the House approved the auto aid bill
on December 10, the Senate voted it down. Without the
support of both the House and the Senate, the proposed
legislation was dead.
Wagoner was stunned and despaired for the future
of the company he had served for over thirty years. But
his despair turned to elation when he got a telephone
call from the Bush administration. The administration
had decided the U.S. Treasury could, after all, use
the TARP funds to provide loans to GM as well as to
Chrysler. (Ford had decided it could survive without government
money.) On December 19, 2008, President Bush
announced that the U.S. Treasury would provide GM with
a $13.4 billion loan from the TARP fund, while Chrysler
would get a $4 billion loan. In announcing the assistance
to the auto companies, the Bush administration said “the
direct costs of American automakers failing and laying
off their workers . . . would result in a more than one percent
reduction in real GDP growth and about 1.1 million
192 THE MARKET AND BUSINESS
workers losing their jobs.” 4 To get the money, Wagoner
had to agree that by February 17, 2009, GM would hand
over a detailed plan specifying how it would achieve
“financial viability” and the plan had to be acceptable to
U.S. Treasury officials. With his back to the wall, Wagoner
agreed to the terms and on December 31, 2008,
GM got a first installment of $4 billion from its allotted
loan amount; it received another $5.4 billion on January
16, 2009, and a final installment of $4 billion on February
17, 2009.
Many objected that bailouts violated the free market
philosophy embraced by many Americans and replaced it
with a kind of socialism. Republican Senator Bob Corker
said the GM bailout “should send a chill through all
Americans who believe in free enterprise.” 5 Several Republican
members of Congress submitted a resolution on
the bailouts that said they were “moving our free-market
based economy another dangerous step closer toward
socialism.” 6
By February 17, 2009, newly-elected President
Barack Obama had taken office so his administration
would end up finishing the auto bail-out that the previous
administration had set in motion. As part of the
“viability plan,” that he had agreed to submit by February
17, Wagoner was to renegotiate GM’s union contracts to
make its labor costs competitive with foreign car makers in
the U.S., reduce the number and models of cars it made,
shrink its unsecured debt of $27.5 billion down to $9.2
billion by getting creditors to cancel part of their debt in
exchange for GM stock, and invest in fuel-efficient hybrid
and electric vehicles. 7
Wagoner had quickly entered negotiations with
the United Auto Workers (UAW), GM’s major union,
and with creditors. But GM’s creditors had stubbornly
refused to reduce their debt by the amount the government
wanted. In the end, GM did not reach the debt reduction
targets the U.S. Treasury wanted it to reach by
February 17. Nevertheless, in the final “plan for viability”
it submitted to the U.S. Treasury on February 17,
GM said it would cut 37,000 blue-collar jobs and 10,000
white-collar jobs, close 14 plants over three years, eliminate
four of its eight car brands, cut manager salaries by
10 per cent and all other salaries by 3 to 7 percent, and
shift the costs of retiree health insurance to an independent
trust funded in part with GM stock and in part with
debt. However, the plan added, GM would need an additional
$22.5 billion from the government to continue
operating to 2011. 8
The Auto Task Force Obama had put together to review
GM’s proposed plan was not happy with it. Steven
Ratner, who headed up the task force said:
It was clear to us from the “viability plans” that
the companies had submitted on Feb. 17 that
GM and Chrysler were in a state of denial. Both
companies needed gigantic reductions in their
costs and liabilities. They had way too many
plants and workers for expected car volumes.
And their labor costs were out of line with those
of their most direct competitors . . . I was shocked
by the stunningly poor management that we
found, particularly at GM, where we encountered,
among other things, perhaps the weakest
finance operation any of us had ever seen in a
major company. 9
“Team Auto,” as the Obama task force called itself,
spent over a month studying the plan and concluded
that GM’s optimistic assumptions that its market share
would grow in the future, its costs would decline, and in
a few years it would have positive cash flows, were out
of touch with reality. On March 30, 2009, the Obama
administration told the company that its plan was not acceptable
and did “not warrant the substantial additional
investments . . . requested.” Nevertheless, GM was given
60 days, until June 1, to try to extract deeper concessions
from its creditors and was also given another loan
of $6.36 billion to carry it through the next two months.
Although GM continued trying to work with its creditors,
the Obama task force soon realized that the only
way GM would force its creditors to forgive GM’s debt
was by filing for bankruptcy. 10 This would give a federal
judge the authority to cancel as much debt as was needed
for the company to become a viable business again. On
March 31, the U.S. Treasury informed the company’s
board of directors that if it filed for bankruptcy, the government
would provide the funding it would need to
emerge as a viable company.
By this time, Rick Wagoner’s fate had been sealed.
In mid-March, Steven Ratner asked Wagoner about his
plans and he replied, “I’m not planning to stay until I’m
65 but I think I’ve got at least a few years left in me . . . , but
I told the [Bush] administration that if my leaving would
be helpful to saving General Motors, I’m prepared to do
it.” 11 On Friday, March 27, Wagoner attended a meeting
with the Auto Task Force to discuss GM’s restructuring
plans. Before the meeting Steven Ratner pulled him aside
and said, “In our last meeting you very graciously offered
to step aside if it would be helpful. Unfortunately our conclusion
is that it would be best if you did that.” Wagoner
agreed to step down, and on March 30 he submitted his
resignation from GM.
On June 1, 2009, GM entered bankruptcy. The U.S.
Treasury created a new company named “General Motors
Company,” and the now bankrupt “Old GM” sold
its most profitable brands and most efficient manufacturing
facilities to the new “General Motors Company”
who used $30 billion of the government’s money to buy
THE BUSINESS SYSTEM: GOVERNMENT, MARKETS, AND INTERNATIONAL TRADE 193
them. The creditors of “Old GM” received a 10 percent
share of the new company plus proceeds from the sale of
the assets of “Old GM.” A 17 percent share of the “New
GM” was put into a trust to pay for union retiree health
care benefits; the union trust also received a $2.5 billion
note from “New GM” and $6.5 billion of its preferred
stock. The government of Canada, which had contributed
$10 billion to bail out several GM plants in Ottawa and
Ontario, got 12 percent of the new company. The remaining
61 percent share of the company became the property
of the U.S. government in return for a total of $50 billion
it pumped into GM. The U.S. government also retained
the right to elect 10 of the 12 members of the board of
directors of the “New GM”; it was now the major owner
of a car company. 12
GM was not the only firm that became a (partially)
state-owned company during the financial crisis. On February
27, 2009, it was announced that in exchange for $25
billion the U.S. Treasury was taking 36 percent ownership
of Citigroup, Inc., a large banking company driven to the
brink of failure by the financial crisis. On September 16,
2008, American International Group, an insurance company
also brought to its knees by the financial crisis, announced
that the government, through its Federal Reserve
Bank, was taking ownership of 80 percent of the company
in exchange for $85 billion.
Many observers claimed that government ownership
of companies is the kind of government ownership
of the “means of production” that Marx and other socialists
advocate. For example, Robert Higgs, editor of The
Independent Review , wrote that “the government is resorting
to outright socialism by taking ownership positions
in rescued firms.” 13 And the Mackinac Center, a conservative
research institute focused on promoting “the free
market,” published an article by Michael Winther that
stated:
There are only two economic systems in the
world . . . These two economic systems are generally
described as “the free market” and “socialism.”
. . . Socialism is characterized and defined
by either of two qualities: Government ownership
or control of capital, or forced pooling and
redistribution of wealth. . . . [T]he current bailout
could be described as “super-socialism” because
it involves every possible component of
socialism: the forced redistribution of wealth,
increased government control of capital, and
even the extreme of socialism, which is government
ownership of capital. Our federal government
is not content to just regulate the markets
(capital), but is also taking the next step of purchasing
ownership interest in previously private
companies. 14
Questions
1. How would Locke, Smith, and Marx evaluate the various
events in this case?
2. Explain the ideologies implied by the statements of:
the letter to the U.S. Congress signed by 100 leading
economists, Joseph Stiglitz, Bob Corker, the Republican
resolution on the bailouts, Robert Higgs, and
Michael Winther.
3. In your view should the GM bailout have been done?
Explain why or why not. Was the bailout ethical in
terms of utilitarianism, justice, rights, and caring?
4. In your judgment, was it good or bad for the government
to take ownership of 61 percent of GM? Explain
why or why not in terms of the theories of Lock,
Smith, and Marx.

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