May 7, 2011

Three Reasons 'Government Loan' = GM Bailout

Quite often I've heard liberals on talk shows defending the bailout of GM as a government loan and not a bailout.  Curiously they don't seem to apply the same vigor to the bank bailouts but oh well. The rationale seems to be that the money was lent to the company with the intention that it would be paid back.  But that doesn't really fit what actually happened and even if it was, it would take a certain leap of faith to believe that truly was what was going on.  Maybe I'm just arguing semantics at this point but I'm not prepared to cede ground on the language of the debate to liberals - conservatives had made that mistake for far too long.


Three reasons that a government loan in the case of General Motors equates to a GM bailout.


(1)  Collateral? No, ownership.

When the government loaned GM money, it didn't simply give the money with a repayment schedule.  It took a 61% ownership stake.  Now that may be a bailout in the sense that the cash infusion saved the company at least temporarily. But it sounds a lot more like a takeover than a loan.  Bank loans don't exchange stock for cash.  That's called a share purchase.  It seems more like a hostile takeover in order to save a company than it is a loan.  Now they can call it a loan and say that every intention is that the money will be paid back.  But the caveat that we're holding stock until the loan gets paid back has connotations of extortion. The point is, you can call it a loan but that's not how a standard loan is set up.  It's not even a loan secured by assets. If a bank were to structure a loan that way, it would demand physical assets not stock.  Assembly plants, real estate etc. is what a bank would demand. It doesn't look like a loan, maybe that isn't what it is.

(2)  Lender of Last Resort?

So let's say that as a lender of last resort, the government had to structure a loan differently than a bank would structure it.  Forget for the moment that the government as a lender is morally questionable.  Is that really what you want your government doing?  You want it in the lending business at all?  And if you do, can you explain what gives government the right to pick and choose who is worthy of its lending and who isn't?  If the government is lending for any reason other than credit worthiness, it is making moral decisions that really don't belong in it's sphere of control.  It's like spreading the wealth, but from another angle.  

But getting back to the point about being the lender of last resort, that still entails being a lender.  Being a lender means expecting a return on your investment at regular repayment intervals over a standard period of time.  The government did not expect anything quite so specific.  Given the point of faith below, the government wasn't adhering to any norms of being a lender so how could what it was doing be considered a loan?  It was something else, it wasn't a loan.  Again, bailout seems more apt a description.

(3)  Faith

Which brings me to my third point.  The government, seeing what shape GM was in made a decision based either on a takeover mentality or else on pure faith that GM would somehow recover and be able to repay it's loans in a reasonable time frame and with a reasonable return.  The reason I say on faith, is because the financial data did not support such a conclusion.  If it did, GM would have been able to get an actual loan from a bank.  It could not.  So it needed a bailout, pure and simple.  No bank could support giving GM that kind of money because there was way to much risk to it.  A loan was not in the cards, so GM needed a bailout.  Again, dress it up as a loan but to use Obama's own vernacular - you can put lipstick on a pig, and it's still a pig.

4 comments:

  1. Hard to argue with any of that.

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  2. And yet they will. That's okay though, any arguing it presents an opportunity to rationally convince someone that there are other ways to look at things. At least that's what I keep telling myself.

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  3. A good read is The Big Short by John Lewis concerning the cause of the finacial crisis. It was casused by the irresposible leveraging and lending practices of the banksters. GM's bankrupcy was due to their finance arm GMAC. You seem to omit any comments about AIG who were bailed out with 4 times more taxpayer money than GM. AIG in turned around and gave Government Sachs 20 billion of that money. The only ones who recieved dollar for dollar restitution.

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  4. To lay that entirely at the feet of the banks, who were mandated by the Community Reinvestment Act to make riskier loans to less than qualified borrowers is unjust. The banks clearly made mistakes but they were trying to make the best of a bad hand. Had their been no CRA mandate, those bad loans would not have been made and would not have to be packaged and re-sold. The debt wouldn't have existed.

    Furthermore, a larger bailout of the banks does not provide cover for bailing out the automaker. Both bailouts were wrong, as was the mandate of the CRA. Multiple wrongs do not make a right.

    ReplyDelete

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