Government Motors

On November 17, in response to strong investor demand, the U.S. government sold $20.1 billion
worth of stock in General Motors Corp., reducing its stake from 61% to 33%. While the
company has a long and storied history from its founding in 1908 to its bankruptcy and bailout in
2008, this sale was dubbed the largest “initial” public offering (IPO) in U.S. history. For those
able to participate in the IPO, the offering was priced at $33 per share, a level chosen by bankers
to give it room to trade up, a normal practice on Wall Street designed to make everyone happy.
Investment bankers selected an initial offering price below where they thought it would trade,
thus promoting quick profits for their favored clients.

Yet was everyone happy? Before the bell, Stephen Rattner, the “Car Czar” who orchestrated
GM’s bailout, went on CNBC to say, “Everybody wants the stock to trade up today. And so,
your viewers are sophisticated but there are others in the country less sophisticated. The stock
trading up is a good thing for the government, a good thing for America, not a bad thing.”

Because the government was selling stock, this was no typical IPO. Presumably, a government
official would have taxpayers in mind, not bankers or their clients. U.S. taxpayers were the
stockholders and their government was admittedly selling their stock at a discount to market
value and calling it a success. The stock opened at $35, hit an intraday high of $35.99 and closed
at $34.19. Those favored customers of the investment banks made a quick couple of bucks per
share while most retail investors were excluded from the deal. Negotiations, by definition,
involve give and take. But in this case, the “unsophisticated” taxpayers were effectively
exploited by the normal practices of Wall Street and Washington.

Given GM’s bankruptcy prior to the government’s $50 billion rescue, this offering was hailed as
a big positive step forward that now stands as an example of “successful” government
intervention. As such, it has helped foster the generally accepted view today among financiers
that Uncle Sam saved the financial system and our economy from another Great Depression.
This sentiment is shared by none other than Warren Buffett.

Despite being one of our country’s greatest living capitalists, Buffett recently wrote a thank-you
note to Washington for its socially motivated intervention into the private economy. He
recounted that “all of corporate America’s dominoes were lined up, ready to topple at lightening
speed.” This was due to the fact that “many of our largest industrial companies, dependent on
commercial paper financing that had disappeared, were weeks away from exhausting their cash
resources.” As a result, he contends that the jobs, incomes, 401(k)’s and money market funds of
American citizens were facing “a destructive economic force unlike any seen for generations”
and that the only counterforce available was the government.

Looking back at November 2008, when GM’s then-CEO Rick Wagoner found himself before
members of Congress begging for money to keep GM alive, the real issue was not GM’s
commercial paper. Rather, GM had $172 billion in debt, $82 billion in assets and had been
losing billions since 2004. Its true crisis was insolvency, a condition shared by many financial
institutions, but certainly not all of corporate America. GM’s lack of cash merely reflected its
inability to refinance its debt, a situation familiar to many Americans today who also borrowed
and spent beyond their means, yet now work to reduce debt without a bailout. Overall, corporate
America was not in jeopardy. Except for those on Wall Street, jobs were not dependent on the
commercial paper market.

According to Federal Reserve loan records released as a result of the new financial regulatory
legislation, the Fed extended loans to many non-financial companies, a fact portrayed by the
media as evidence that the financial crisis stretched further across the economy than many had
realized. Unmentioned is the fact that these non-financial firms were solvent (Caterpillar,
Verizon, Harley-Davidson). Their borrowings from the Fed were shrewd, not desperate.

According to David Stockman, former U.S. Representative from the great auto state of
Michigan, Budget Director under President Reagan, Salomon Brothers investment banker and
founder of Blackstone Group, there was about $2 trillion in commercial paper outstanding on the
eve of the Lehman failure. This market seized up, meaning that issuers could not refinance, or
“roll”, their paper. Yet Stockman contends that “even a cursory review of the composition of the
CP market as of September 2008 shows that the ‘blowup’ was actually about losses on reckless
bets by a few thousand money managers, not the availability of ready cash to millions of Main
Street businesses.” Less than $400 billion of the CP market consisted of funding used to cover
payrolls and similar operating expenses, for which virtually none lacked unused back-up
revolving credit lines at the banks. These back up lines of credit meant that the issuers’ banks
had a legal obligation to make short term loans in the event the commercial paper market became
inaccessible. Any domino effect of bank failures, under the rule of law, would have led to the
FDIC honoring these Main Street contracts as Wall Street suffered.

GM’s bailout is an example of politicians in government today trying to create an environment

where everyone wins. Yet the economic reality is that not everyone deserves a trophy. When
people labor and produce, some succeed while others do not. Bailouts stem from the idea that
we should take all of the labor and production, throw it into the pool and distribute it evenly,
whether you labored or not, were successful or not, or were smart or not.

These two competing philosophies are reflected by Buffett’s and Stockman’s recent comments.
Over time, the cultures that have lived on the “everybody wins” philosophy have declined while
the cultures that have operated according to economic reality have risen and become great,
mighty, and powerful. Sadly, the natural financial purging of 2008 was stopped short, causing
our nation to drift deeper into a slower-growth, Japanese-style controlled economy. This
unnecessary path was chosen by our panicked leaders who understood the interests of Wall
Street more than they understood the principles of sound money and economics. Main Street
America voiced its objections in the November elections. The next few months should reveal
whether America will return to the roots of its strength – economic freedom and the rule of law.

John Healy