Post GM America

At a hearing before the Senate Commerce Committee today, Fritz Henderson, GM's CEO, said that GM has no choice but to dump nearly 1600 dealers (and about 100,000 jobs) over the next eighteen months.

Committee Chair John Rockefeller responded : "Let me be very clear: I don't believe that companies should be allowed to take taxpayer funds for a bailout and then leave local dealers and their customers to fend for themselves with no real notice and no real help. That is just plain wrong."

Senator Rockefeller missed the memo. Dumping losing contracts without real notice and without real help is exactly what bankruptcy will permit GM to do.

Rockefeller's frustration touches a nerve. If the government can't expect to see a return on its investment, what exactly is the public purpose of the bailout?

In an op ed for Financial Times, Richard Reich wrote: "The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain."

Reich says that industrial adjustment is just too hard to discuss, much less accomplish politically. One group wants to save jobs and communities that depend on US automakers' survival, without regard to the public cost. An opposing group wants to keep government out of industrial collapse, let the chips fall where they may, and let market vultures clean up the mess. The bailout of GM and Chrysler temporarily placates both groups. The first group gets hope that their jobs and communities have a chance of surviving. The second group gets to imagine that the bailout is a restructuring made necessary because of a mysterious short term liquidity problem, and that with $50 billion in governmental lubrication, that new car smell will be back.

The divide between the groups seems to be more political than real. People whose jobs and mortgages depend on the US auto industry don't like wasting tax revenue. And ardent free marketeers who oppose the bailout of a "company" like GM accept the role of government in easing the pain for actual people who fall on hard times.

GM and Chrysler are short timers. The bailout and the restructurings are life support that at best will give the grieving middle class time to prepare for the end. We are left to wonder: what will post-GM America be like?

Fries With that Chevy?

Yesterday, President Obama described the US government as a "reluctant shareholder" in GM. Indeed.

How lean and mean will new GM have to be to make taxpayers' $50 billion investment pay off? GM's market capitalization will have to surpass that of McDonald's (MCD)—rising to nearly $69 billion just for taxpayers to break even. (Yesterday, McDonalds's market capitalization was $66.6 billion.) And that's likely to take awhile. As of May 29, GM's market capitalization was in the neighborhood of $500 million.

Under the proposed reorganization plan, of the $50 billion total investment, the US's equity stake will be $41.2 billion or about 60% of the New GM pie; another $8.8 billion will be debt. For a 60% stake to be worth $41.2 billion, the market capitalization of the reorganized company will have to rise to $68.7 billion.

Here's the visionary plan on which the return on this super-sized investment depends. New GM is going to make cars people want to buy at a profit.