Week in Review
So many people fear the low prices of corporations. They say they will put higher priced Mom and Pop shops out of business. Then when they have a monopoly they will raise their prices and gouge their customers. Which is silly. Because corporations can’t create a monopoly. Only government can grant them one. Allowing them to charge the high prices once the government eliminates all competition. But even when the government does if there is a market for lower prices some competition will find a way (see 3 epic fails that prove Uncle Sam is a terrible venture capitalist by Burton W. Folsom Jr. and Anita Folsom posted 4/19/2014 on the New York Post).
After 20 years in Europe perfecting his steamboat, an inventor named Robert Fulton returned to the US in December 1806.
He knew that a legislator, Robert Livingston of New York, would back him to the hilt. Livingston was a Founding Father who believed that steamboats would work well on the wide rivers of North America. Livingston and Fulton obtained a monopoly from the New York legislature for the privilege of carrying all steamboat traffic in New York for 30 years, if they could produce a working steamboat within two years…
One problem with Fulton’s monopoly, however, was that it affected shippers in neighboring states. As steamboats became more common, the Fulton monopoly meant that other companies couldn’t sail in New York waters without fear of fines. The monopoly also kept ticket prices high.
Finally, in 1817, Thomas Gibbons, a New Jersey steamboat man, tried to crack Fulton’s monopoly when he hired young Cornelius Vanderbilt. Gibbons asked Vanderbilt to run steamboats in New York and charge less than the monopoly rates…
For 60 days in 1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth, NJ, to New York City. He became a popular figure on the Atlantic as he lowered the fares and eluded the law.
Finally, in 1824, in the landmark case of Gibbons v. Ogden, the US Supreme Court struck down the Fulton monopoly. Chief Justice John Marshall ruled that only the federal government, not the states, could regulate interstate commerce.
This extremely popular decision opened the waters of America to competition. A jubilant Vanderbilt was greeted in New Brunswick, NJ, by cannon salutes fired by “citizens desirous of testifying in a public manner their good will.”
On the Ohio River, steamboat traffic doubled in the first year after Gibbons v. Ogden and quadrupled after the second year. The real value of removing the Fulton monopoly was that the costs of traveling upriver dropped. Passenger traffic, for example, from New York City to Albany immediately dipped from $7 to $3 dollars after the court decision.
Only governments can maintain and enforce a monopoly. And only a business with a government enforced monopoly can gouge their customers. For with the government eliminating all competition what else is a consumer to do? He or she has no choice but to buy from the business with the government enforced monopoly. The same is true today.
Free market capitalism is always finding a better way to do something that costs less. But people who enjoy government monopolies try to fight back. To keep their government privileges. Just look at the UAW and the automotive industry. Which used the power of their government privilege to restrict competition. Such as with tariffs and import quotas. Which only let the UAW to continue to burden the American automotive industry with ever more costly union contracts that ultimately led to their bankruptcy/government bailout. All the while keeping cars more expensive than they had to be. As the UAW used their government privilege to gouge American automotive customers.
Tags: capitalism, competition, corporations, Fulton, government enforced monopoly, government monopolies, government privilege, lower prices, monopoly, steamboat, UAW, Vanderbilt
Lawyers make a lot of Money without Contributing anything Tangible to Society
An attorney was sitting in his office late one night when Satan appeared before him. Satan said, “I have a proposition for you. You can win every case you try for the rest of your life. Your clients will adore you, your colleagues will stand in awe of you and you will make embarrassing sums of money. All I want in exchange is your soul, your wife’s soul, your children’s souls, the souls of your parents, grandparents, parents-in-law, the souls of all your friends and law partners.” The lawyer thought about this for a moment then asked, “So, what’s the catch?”
That’s funny, isn’t it? Lawyers. Ambulance chasers. The butt of so many jokes. Why? Well, some will say they deserve it. Because they do chase ambulances. And will pass out their business cards if they’re on a sinking ship. Because sinking ships are good for lawsuits. And lawyers love to sue. For they can make a lot of money without contributing anything tangible to society. All they do is get between two parties when large sums of money change hands. And put a portion of that money into their pockets. That’s how they earn their living. Taking money away from others. They’re parasites. Just to get rich. And the big tort lawyers (those who sue people and businesses) get really rich. Allowing them to live very privileged lives.
Take a class action lawsuit. Where they bring a lot of wronged people together to sue a large corporation. The old David and Goliath thing. A little person can never take on a big corporation. But a whole class of them can. When represented by a tort lawyer. Who liken themselves as heroes of the little guy. Taking the big corporation on to make them pay for all the horrible things they’ve done to their clients. But who do they really help? Let’s say they win a judgment from a big corporation of $250,000,000. That’s a lot of money. From that sum they take their cut. Let’s say 50%. Leaving $125 million for the people the corporation wronged. That’s a lot of money. So the people won, too, right? Not really. For there are a lot of people represented in these class actions. Let’s say 5 million in our example. So if you divide the $125 million by 5 million that comes to $25 per person. So, again, who did the lawyers really help? The lawyers. Which is why there are so many lawyer jokes.
In the Private Sector if you want to spend Half of your Life Retired you have to Pay for It
Lawyers vote Democrat. Because they like being privileged people. They don’t want the laws changing that allow them to get so rich when money exchanges hands. Which is why they donate heavily to the Democrat Party. And don’t donate to the Republicans. Who complain about the high costs of frivolous lawsuits to businesses in an overly litigious society. It’s so bad that a footnote in the financial statements of a corporation about a lawsuit is not that big of a deal. Why? Because so many corporations are sued that investors are more surprised to see one that isn’t being sued. This is why Republicans want tort reform. And pass ‘loser-pays’ into law. Like many other countries have. Where the loser in court pays for the attorney fees for the side that wins. Which would greatly cut down on frivolous lawsuits. And cut the costs businesses incur from these frivolous lawsuits that they pass on to their customers. So the lawyers donate to Democrats. To prevent any tort reform that would change the easy way lawyers have of getting rich.
It’s the world’s oldest profession. Screwing people for money. But lawyers aren’t the only ones seeking privilege. There are a lot of others, too. Interestingly, they, too, support the Democrat Party. Such as the United Autoworkers. They donate heavily to the Democrat Party to keep labor laws favorable to unions. To make it more difficult for their nonunion competition. And to use the power of government to force people to pay may for a union-made car. Allowing their union members to live better lives than those outside of the UAW. And when even that doesn’t allow General Motors to pay its bills when selling a record number of cars the UAW goes to government for a bailout of their woefully underfunded pension fund. So their union members can continue to have a more generous retirement at an earlier age than those outside of the UAW.
Teacher unions seek privilege, too. You hear a lot about how the teachers don’t earn that much. But then again, they don’t work that much. Getting 3 months off in the summer. So you can’t compare their wages to people who don’t get the 3 summer months off. But for teachers it’s not so much about the paycheck. It’s the benefits. Very generous health insurance coverage. And pensions. Which have gone the way of the dodo in the private sector. Because people are just living too long into retirement. When they first set up these pensions people were dying in their sixties. The actuaries never saw people living into their eighties as common. So in the private sector if you want to spend half of your life retired you have to pay for it. And you work as long as necessary to fund the retirement you want. The union pensions just can’t work these days as they once did. Which is why teacher unions like the United Autoworkers and lawyers support the Democrat Party. They want to keep their privileged lives.
The Wealth Transfers of the Welfare State give Democrats Money and Privilege
Of course privilege is nothing new to the Democrat Party. They have long stood for privilege. Even now. As the Democrats provide themselves all kinds of exceptions from the Affordable Care Act. For more expensive and lower quality health insurance is good for the masses. But not for the privileged elite. Or their special friends who support them so generously with campaign donations. Congress has had a history of exempting themselves from the laws they pass for us. It took the Republican winning of the House in the 1994 midterm elections to change that. The first Republican-controlled House since 1952 required Congress to be held to the same laws as the rest of us. A bitter pill for Democrats to swallow. For their feelings of privilege go way back.
The Democrat Party can trace its pedigree back to Thomas Jefferson’s Democratic-Republican Party. The party of the slave-owning planter elite. Who from day one fought for their privilege starting with the Three-Fifths Compromise. To give them a greater say in the new national government than their voting population allowed. The planter elite’s South turned into an Old World aristocracy. With great manors for the landed aristocracy. And vast lands worked by slaves. Very similar to feudalism in the Old World. And something they fought hard to keep. Their privilege. The Southern Democrats used the power of the national government (such as the Fugitive Slave Act) to interfere with state laws in the North. To protect their feudalism by keeping slavery legal as long as they could while the north was industrializing and modernizing. With paid laborers. When they lost control of the House due to the growing population in the North they turned to war. Saying that the national government was interfering with state laws in the South. And getting poor southern farmers who owned no slaves to fight and die so the southern aristocracy could live on.
When the Southern Democrats lost the American Civil War they scrambled to maintain their privilege. They unleashed a terror on the freed slaves and Republicans with the KKK. The Democrats then wrote Jim Crowe Laws. Separate but equal. Government-enforced racial segregation. During debate of the Civil Rights Act of 1964 Democrat and former Exalted Cyclops of the KKK Robert Byrd filibustered for 14 hours. To keep the South segregated. With power and privilege in a new aristocracy. Centered not on land but political power and cronyism. Even becoming the party for blacks as ironic as that is. Trading government programs for votes. And destroying the black family in the process. Aid to Families with Dependent Children (AFDC) replaced black fathers with government. And moved single mothers and their children into housing projects that became infested with drugs and crime. But this large (and failed) welfare state transferred a lot of wealth to the Democrats. Giving them money and privilege. That they can use to maintain their power. By taking care of those who take care of them. Lawyers, the UAW, teacher unions and other privilege seekers. For nothing has changed on the left. They have been and always will be an aristocratic-thinking, privilege-seeking people who want to live better than the rest of us. While we pay for their privileged lives.
Tags: aristocracy, aristocratic-thinking, attorney, class action lawsuit, Democrat, Democrat Party, far Left, feudalism, frivolous lawsuits, health insurance, lawsuits, lawyer, money, North, Old World, pension, planter elite, privilege, privilege seekers, privilege seeking, privileged elite, privileged lives, Republican, retirement, slaves, South, Southern Democrats, teacher unions, teachers, tort, tort lawyer, tort reform, UAW, union, unions, United Autoworkers, wealth, welfare state
Week in Review
Detroit had a massive public sector. Lots of union government jobs. With very generous benefits. Then the city began losing population. As the city shrank the public sector did not. As the city could no longer support the public sector on tax revenue they turned to borrowing. At her bankruptcy her pension obligations were in the billions. And were just unsustainable. With a lot of those retirees going to see huge cuts in their retirement benefits. A first for a public sector union. And one that may set a precedent for other impoverished cities (see Cities where poverty is soaring by Michael B. Sauter and Thomas C. Frohlich, 24WallSt.com, posted 12/16/2013 on Yahoo! Homes).
Many of these cities show a symptom of the regions hit hardest by the recession — a significant decline in real estate value. Nationally, the average home value during the three-year period of 2010-2012 was down by 9% compared to the previous three-year period. In eight of the 10 cities with soaring poverty rates, property values fell by at least 10%. Homes in Eastpointe lost nearly half of their value. In Inkster, Michigan, another city where poverty grew substantially, an average of 43.3% of homes were worth less than $50,000 between 2010 and 2012, compared to just 11.8% of homes during the 2007-2009 period…
Several of these cities were already struggling prior to the recession, in part because of their reliance on manufacturing. The industry had been declining for years, and the recession only made matters worse. In Salisbury, North Carolina, employment in manufacturing fell from 15.5% of all jobs to 8.3%. Goshen, Indiana, another city with a major increase in poverty, is heavily dependent on the auto industry — more than a third of the working population was employed in manufacturing between 2010 and 2012. According to Joe Frank at the Indiana Department of Workforce Development, this dependence had particularly dire consequences during the recession.
The Democrats are all Keynesians. Who believe in government spending. And keeping interest rates artificially low to stimulate the economy. To encourage people to buy big expensive houses. Just because interest rates are low. So people did. With mortgages so cheap everyone was getting them. And as these buyers flooded the market housing prices soared. Creating a great housing bubble. Which collapsed when interest rates rose. Resetting the rates on those subprime adjustable rate mortgages (ARMs). Raising monthly payments. Beyond what some people could afford. Forcing them into bankruptcy. Creating the subprime mortgage crisis. And the collapse of housing prices.
The UAW made American cars so expensive people started buying the less expensive imports. As most people don’t have UAW contracts giving them a fat paycheck and generous benefits. Leaving them to get by on less than UAW workers. Which meant they turned to the less costly imports. Built by companies that didn’t have those great legacy costs of years of overly generous contracts that became unsustainable. Pension costs and health care for retirees (which outnumbered active workers) forced GM and Chrysler to ask for a government bailout to avoid bankruptcy. Asking the taxpayer to help them pay the generous pensions and health care costs of others. Instead of bringing these benefits into line with the rest of America.
Democrats are Keynesians. They believe in government intervention into the private sector economy. And they protect their friends in unions to get their votes. Raising costs for everyone else. These policies, though, are just impoverishing American cities. At least the ones dominated by unions and/or Democrats.
Tags: Bankruptcy, Democrats, Detroit, government spending, interest rates, Keynesians, manufacturing, mortgage, pension, pension obligations, public sector, UAW
Week in Review
It’s not been a good year for Detroit. Well, it’s been more than a year. It’s been a few bad years. Actually, it’s been a great many bad years. Since 1970. When Ford Motor Company Chairman Henry Ford II joined with other business leaders to form Detroit Renaissance. To revitalize the City of Detroit. And some 42 years later, the City of Detroit is still struggling (see Detroit’s Misery Can Be Its Turning Point by Micheline Maynard posted 2/23/2013 on Forbes).
Detroit boosters were dealt a one-two blow this week by the kind of outsiders they have come to resent.
First, a state review panel declared that a financial emergency existed in the city, making it likely that Michigan Gov. Rick Snyder will appoint an emergency financial manager with sweeping powers.
Then, Forbes weighed in by declaring Detroit the nation’s most miserable city, based on a series of criteria that include crime, unemployment, foreclosures and home value…
Although General Motors is based in Detroit, and Chrysler recently opened an office there, the automobile industry is not going to provide the vast numbers of jobs the city needs to become solvent.
And there lies the problem for Detroit. A city that grew big and rich off of the automobile industry saw a steady exodus and a declining tax base when the automobile industry declined. Live by the automobile. Die by the automobile. And it’s just not Detroit. A couple of other Michigan cities broke into the top 10 of Forbes’ America’s Most Miserable Cities 2013.
#7 Warren, Mich.
Troy and Farmington Hills are part of the government-defined Warren metro division. Like Detroit, the Warren metro has seen home prices collapse–off 53% the past five years.
#2 Flint, Mich.
Flint has been demolishing homes as the city shrinks with residents leaving in search of jobs. Only Detroit has a higher net out-migration rate. Flint ranks third worst for violent crime, behind Detroit and Memphis.
#1 Detroit, Mich.
Violent crime in the Detroit metro was down 5% in 2011, but it remains the highest in the country with 1,052 violent crimes per 100,000 people, according to the FBI. Home prices were off 35% the past 3 years, which is the biggest drop in the U.S.
If you seek a pleasant peninsula* you’d do better looking for one where the UAW isn’t dominant. Perhaps Florida. For the UAW is a city killer based on these Michigan cities. (*The official state motto of Michigan is “If you seek a pleasant peninsula, look about you.”)
The Big Three dominated these cities. Where fat pay and benefit packages were passed on to consumers in overpriced vehicles. The Big Three’s monopoly on car sales allowed them to make fat profits. And pay enormous amounts of taxes to the cities that had the factories that assembled their cars. City coffers were so flush with cash city governments grew. And city workers enjoyed fat pay and benefit packages. This was the high water mark of the UAW. Just after public sector unions had joined them on the gravy train. But then something happened that devastated the UAW. Consumers got choice. They no longer had to buy overpriced ‘rust buckets’ the Big Three was putting out during the Seventies. For the Japanese gave them choice.
And so began the great decline of the Big Three. Quality and value did them in. It’s what the people wanted. While the UAW wanted consumers to pay more and get less. So they could continue to enjoy their fat pay and benefit packages. As the jobs went away so do did the taxes. The cities bloated with all those government workers with their fat pay and benefit packages tried to maintain the size of their governments even while the tax base was declining. Reducing other government services as they had little money left over after paying those fat pay and benefit packages.
With fewer and fewer jobs available people left these cities. Empty houses dotted the horizon. And housing prices fell. With the tax base continuing to decline. Poverty rates rose. As did city services for the impoverished. Leaving even less for other city services. Causing a further exodus from the city. Urban blight followed. As did crime. Causing a further decline in property values.
Low interest rates helped boost housing prices. For awhile. President Clinton’s Policy Statement on Discrimination in Lending kicked off subprime lending in earnest as lenders bowed to the Clinton Justice Department to put more low-income and minorities into homes they couldn’t afford. Creating a huge housing bubble. Built on easy credit. Artificially low interest rates. And the adjustable rate mortgage (ARM). When rates went up all those low-income and minorities who bought houses they couldn’t afford defaulted on their higher mortgage payments. Creating the subprime mortgage crisis. Giving us the Great Recession. Creating a flood of foreclosures. A free fall in housing prices. And more of the same that helped put those three Michigan cities into the top ten of Forbes’ America’s Most Miserable Cities 2013.
Michigan recently opted to become a Right-to-Work state. Greatly angering the UAW and those public sector unions. But it may be just what Michigan needs to reverse the great decline caused by the UAW and the public sector unions that devastated some of Michigan’s greatest cities. One thing for sure it can’t get any worse. Not when being a union state for so long secured three places in the top ten of Forbes’ America’s Most Miserable Cities 2013.
Tags: automobile, automobile industry, Big Three, choice, city of Detroit, city workers, declining tax base, Detroit, easy credit, fat pay and benefit packages, flint, foreclosure, house prices, housing bubble, housing prices, If you seek a pleasant peninsula, interest rates, jobs, Michigan, most miserable city, property values, subprime, tax base, taxes, UAW, Warren
GM’s Problems were caused by Franklin Delano Roosevelt and his Ceiling on Wages
The GM bailout is still controversial. It was part of the 2012 campaign. It was why we should reelect President Obama. Because Osama bin Laden was dead. And General Motors was alive. But the bailout didn’t fix what was wrong with GM. Why it went bankrupt in the first place. The prevailing market price for cars was below their costs. And what was driving their costs so high? It was labor. It was the UAW wage and benefit package that made it impossible for GM to sell a car profitably.
GM’s problems go back to Franklin Delano Roosevelt. The country was suffering in the Great Depression with double-digit unemployment. He wanted to get businesses to hire people. To reduce unemployment. And pull us out of the Great Depression. So how do you get businesses to hire more people? Hmmm, he thought. Pay people less so businesses have more money to hire more people. It was brilliant. So FDR imposed a ceiling on wages. Why did FDR do this? Because he was from a rich family who didn’t understand business or basic economics.
Of course there was one major drawback to this. How do you get the best talent to work for you if you can’t pay top dollar? Normally the best talent can go to whoever pays the most. But if everyone pays the same by law you might as well work at the place closest to your house. Or across from the best bars. No, if a business wanted the best workers they had to figure out how to get them to drive across town in rush hour traffic and sit in that traffic on the way home. A real pain in the you-know-what. So how to get workers to do that if you can’t pay them more? You give them benefits.
Toyota doesn’t have the Legacy Costs that Bankrupted an Uncompetitive GM
And this was, is, the root of GM’s problems. Those generous pension and health care benefits. Things we once took care of ourselves. Before our employers started providing these. And the UAW really put the screws to GM. Getting great pay, benefits and workplace rules. For both active workers. And retirees. Even laid-off workers. Such as the job bank. Where GM paid workers who had no work to do. It’s benefits like this that have bankrupted GM. Especially the pensions and health care costs for retired workers. Who outnumbered active workers. Those people actually assembling the cars they sell.
It’s these legacy costs that have made GM uncompetitive. Toyota, for example, didn’t suffer the FDR problem. So their costs for retired workers don’t exceed their costs for active workers. In fact let’s compare GM and Toyota for the four years just before GM’s government bailout (2005-2008). We pulled financial numbers from their annual reports (see GM 2005 & 2006, GM 2007 & 2008, Toyota 2005 & 2006 and Toyota 2007 & 2008). We’ve used some standard ratios and plotted some resulting trends. Note that this is a crude analysis that provides a general overview of the information in their annual reports. A proper analysis is far more involved and you should not construe that the following is an appropriate way to analyze financial statements. We believe these results show general trends. But we offer no investment advice or endorsements.
We get the current ration by dividing current assets by current liabilities. These are the assets/liabilities that will become cash or will have to be paid with cash within 12 months. If this ratio is 1 it means current assets equals current liabilities. Meaning that a business will have just enough cash to meet their cash needs in the next 12 months. If the number is greater than 1 a business will have even a little extra cash. If the number is less than 1 a business is in trouble. As they won’t have the cash to meet their cash needs in the next 12 months. Unless they borrow cash. Toyota’s current ratio fell slightly during these 4 years but always remained above 1. Falling as low as 1.01. Whereas GM’s current ratio was never above 1 during these 4 years. And only got worse after 2006. Showing GM’s financial crash in 2008.
The GM Bailout did not address the Cause of their Bankruptcy—UAW Pensions and Health Care Benefits
There are two basic ways to finance a business. With debt. And equity. Equity comes from outside investors (when a business issues new stock). Or from profitable business operations. Which typically accounts for the majority of equity. Profitable business operations are the whole point of running a business. And it’s what raises stock prices. To see which is providing the financing of a business (debt or equity) we calculate the debt ratio. We do this by dividing total liabilities by total assets. If this number equals 1 then total assets equal total liabilities. Meaning that 100% of a business’ assets are financed with debt. And 0% with equity. Lenders do not like seeing this. And will be very reluctant to loan money to you if your business operations cannot generate enough profits to build up some equity. And that was the problem GM had. Their business operations could not generate any profits. So GM had to keep borrowing.
GM went from bad to worse after 2005. Their debt ratio went from 1.02 in 2006. To 1.24 in 2007. And to 1.94 in 2008. Indicating massive borrowings to offset massive operating losses. And how big were those losses? They lost $17.806 billion in 2005. $5.823 billion in 2006. $4.309 billion in 2007. And in the year of their crash (2008) they lost $21.284 billion. Meanwhile Toyota kept their debt ratio fluctuating between 0.61 and 0.62. Very respectable. And where lenders like to see it. As they will be more willing to loan money to a company that can generate almost half of their financing needs from profitable business operations. So why can’t GM? Because of those legacy costs. Which increases their cost of sales.
GM’s cost of sales was close to 100% of automotive sales revenue these 4 years. Even exceeding 100% in 2008. And it’s this cost of sales that sent GM into bankruptcy. Toyota’s was close to 80% through these 4 years. Leaving about 20% of sales to pay their other costs. Like selling, general and administrative (S,G&A). Whereas GM was already losing money before they started paying these expenses. Thanks to generous UAW pay and benefit packages. The job bank. And the even greater costs of pensions and health care for their retirees. It’s not CEO compensation that bankrupted GM. It was the UAW. As CEO compensation comes out of S,G&A. Which was less than 10% of sales in 2007 and 2008. Which was even less than Toyota’s.
GM’s costs kept rising. But they couldn’t pass it on to the consumer. For if they did the people would just buy a less expensive Toyota. So GM kept building cars even though they couldn’t sell them competitively. And sold them at steep discounts. Just to make room for more new cars. So the UAW could keep building cars. Incurring massive losses. Hoping they could make it up in volume. But that volume never came.
Toyota continued to increase sales revenue year after year. But GM’s sales grew at a flatter rate. Even falling in 2008. It was just too much. GM was such a train wreck that it would have required a massive reorganization in a bankruptcy. Specifically dealing with the uncompetitive UAW labor. Especially those pensions and health care benefits for retirees. Which the government bailout did not address. At all. The white collar workforce lost their pensions. But not the UAW. In fact, the government bailout went to bolster those pension and health care plans. So the underlying problems are still there. And another bankruptcy is likely around the corner.
Tags: active workers, assets, Bankruptcy, benefits, cash, cash needs, ceiling on wages, CEO compensation, cost of sales, current assets, current liabilities, current ration, debt, debt ratio, equity, FDR, finance, General Motors, GM, GM bailout, government bailout, Great Depression, health care benefits, job bank, legacy costs, liabilities, operating losses, pension, profitable business operations, retirees, sales, Total Assets, Total Liabilities, Toyota, UAW
Week in Review
GM could have filed bankruptcy. Like many companies do. They reorganize. Fix the problems that caused them to go bankrupt. Then they emerge leaner and meaner. And are able to compete in the market that bankrupted them before their reorganization. That’s the usual path. GM did not take it. Why? Because the thing that bankrupted GM was its high union costs. Especially their legacy costs. Paying pension and health care costs for more retirees than they have active workers.
Had they gone through a normal bankruptcy they would have made GM competitive again. Which meant doing something to those costly union contracts. But as the UAW is a valuable resource for the Democrat Party President Obama swept in and protected the UAW. Giving them the money they needed to fund those pension plans. Without fixing their competiveness problem. Meaning they will likely need another bailout (see GM to benefit from tax break for years by David Shepardson posted 12/20/2012 on The Detroit News).
The Treasury Department’s decision to begin its exit from General Motors Co., despite low stock prices, means U.S. taxpayers are almost certain to incur large losses on the $49.5 billion bailout of the Detroit automaker.
At current stock prices, the government stands to lose nearly $13 billion.
To break even, it would need to sell its remaining 300 million shares for about $70 each. The Treasury will sell its remaining shares over the next 15 months, likely in a series of small sales, and that could stem some of the losses.
Unlike the 1980 Chrysler bailout, the Obama administration didn’t require GM to repay all of its government funds. Instead, the government swapped about $42 billion for a 61 percent equity stake in the automaker.
Former auto czar Steve Rattner said the government made the decision because it didn’t want the new GM to be carrying crushing debt. Instead, it gave GM billions of dollars after its bankruptcy to operate.
GM also got other financial benefits. For example, it has legally avoided paying federal income taxes since exiting bankruptcy, even though it has earned $16 billion in profits.
And GM likely will pay no income taxes for many years, because Treasury rulings let GM use $18 billion in losses from the “old GM” left behind in bankruptcy to offset profits.
Interesting. We’re going to raise taxes on small business owners (those S corporations and LLCs who earn more than $250,000 in business profits that pass through to their personal tax returns) because those who can afford to pay a little more should. But a company earning $16 billion (yes, that’s billion with a ‘B’) in profits doesn’t have to pay any income taxes. Why? Small business owners create far more jobs than GM does. So why does GM get preferential treatment? Because small businesses aren’t unionized. And don’t pay union dues that feed back to the Democrat Party.
When the Carter administration bailed out Chrysler they at least got all of our money back. They made no gifts of taxpayer money. If that wasn’t bad enough our gift to GM didn’t fix their competitiveness problem. So that when GM once again pays income taxes they will be right back where they were before. Starved of cash. And unable to fund their pension plans.
Had GM gone through a normal bankruptcy they would already be back in business. Competitive. And paying income taxes. Without the taxpayers picking up the tab. President Obama didn’t save GM. He saved the UAW. Who will eventually destroy GM with their legacy costs.
Tags: bailout, Bankruptcy, competiveness, GM, income taxes, legacy costs, pension, UAW, union
Week in Review
The U.S. government bailed out GM. Instead of letting them go through a normal bankruptcy proceeding that would make GM competitive again so they could sell cars in the U.S. again. Instead, the government gave GM taxpayer money to fund their pension and retiree health care costs. Which will do nothing to improve their competitiveness. Or create new jobs in the U.S. So what will that massive government investment do for GM? Allow them to expand and create jobs…in China (see GM Chinese venture to build $1 billion plant in Chongqing by Ben Klayman posted 11/28/2012 on Reuters).
General Motors Co (GM.N) and its Chinese joint-venture partners said on Wednesday they plan to build a $1 billion auto assembly plant in the city of Chongqing as the GM group bids to remain the leader in the world’s largest auto market…
Earlier this month, GM and its Chinese partners opened a plant in the southern city of Liuzhou for its low-cost Baojun brand. That plant will also eventually have an annual production capacity of 400,000 vehicles…
In September, GM opened a large vehicle test track west of Shanghai. GM and its partners invested $252 million to build what officials called the country’s largest proving ground.
In addition to Liuzhou, the joint venture currently operates a plant in Qingdao. GM and SAIC, through a different joint venture, also have a plant in Shanghai, and several more in northeast China.
This is not helping the U.S. economy. Building plants and creating jobs in China. All this is doing is allowing GM to make money like Wall Street makes money. By investing money. And getting a return on their Chinese investments. Government Motors, I mean, General Motors is doing the very thing the Democrats hammered Mitt Romney for doing during the 2012 election. Creating jobs in China. The only difference, of course, is that Romney didn’t use U.S. tax money to create any of his jobs.
So the government bailout of General Motors didn’t help anyone but the UAW whose high costs were making them uncompetitive (the source of all of GM’s problems). And the Chinese. It didn’t create any new jobs in America. And it didn’t help GM become more competitive. Forcing them to rely on their Chinese job growth because their cost structure just won’t let them sell more cars or add more jobs in the United States.
Tags: bailout, creating jobs, creating jobs in China, General Motors, GM, government bailout, jobs, UAW
Week in Review
President Obama saved General Motors (GM). He bailed them out. Instead of letting them go through normal bankruptcy proceedings where the creditors are protected and contracts are rewritten so the company can become competitive again. The Obama bailout didn’t follow normal bankruptcy proceedings. Nor contract law. Secured creditors became unsecured by presidential decree. They transferred ownership to the UAW. And billions of taxpayers’ money propped up the UAW pension fund. None of which improved GM’s competitiveness. And the Obama administration poured more money into the Chevy Volt that no one wanted and few are buying.
But the president did all of these things to save US jobs. Even though normal bankruptcy proceedings would have made GM more competitive and actually created more jobs. In fact, under normal bankruptcy proceedings those new jobs would probably have been in the US (see GM opens China test track in effort to remain market leader by Ben Klayman posted 9/21/2012 on Reuters).
General Motors Co(GM.N) opened a new, large vehicle test track west of Shanghai on Saturday as part of its push to retain its leading market share in the world’s largest auto market.
The No. 1 U.S. automaker and its joint venture partners, including SAIC Motor (600104.SS), invested about $252.5 million to build what GM China President Kevin Wale called the country’s largest proving ground…
GM invests $1.5 billion annually in China.
The government still owns GM stock. So that investment in China was technically made by a company the US government partially owns. And some of those dollars invested in China were US taxpayer dollars. So the Obama bailout of GM has allowed GM to invest in China. And to create jobs in China.
GM is making the investment despite a slowing in the Chinese auto market because it is focused on the long-term growth prospects, Wale said…
GM, whose joint venture in China began building vehicles in 1999, sells under the Buick, Chevrolet, Cadillac, Opel, Wuling, Baojun and Jiefing brands. Wale said GM had to continue to roll out new products as the market grows, including adding products in the SUV and luxury car segments.
The government has raised fuel economy standards and pushed the Chevy Volt. So we would stop buying the cars we want to buy. And start buying the cars they want us to buy. Like the Chevy Volt. While the Chinese are expanding the SUV and luxury car segments. Making it easy for the Chinese to buy the cars they want to buy. Thanks to that taxpayer-financed government bailout.
Tags: Chevy Volt, China, creditors, General Motors, GM, jobs, normal bankruptcy proceedings, Obama bailout, secured creditors, UAW
Week in Review
The government rarely runs anything well. Because few politicians have any business experience. Which explains why the more they intervene into the private sector economy the more the economy suffers. Case in point GM. GM was losing money because they couldn’t sell cars at a high enough price to pay their bills. Especially their retiree pension and health care costs. Instead of allowing GM to go through the bankruptcy process to fix their problems so they could sell cars at prices that would pay their bills the government bailed out the UAW. And did not fix their underlying problem. What caused all of their problems in the first place. High labor and retiree costs. So it’s no surprise that GM did not emerge leaner and meaner from bankruptcy. Like the airlines typically do. Instead they left the problems in place. And told GM to build the Chevy Volt (see The Chevy Volt: Dead or alive? by Brooke Crothers posted 9/3/2012 on CNET News).
Depending on who you believe, the Volt is either alive and kickin’ or in its death throes.
The most recent news about GM’s plug-in hybrid gives fodder to both sides. On the upside, GM said on Wednesday that it already has sold more than 2,500 Volts this month. That would be a monthly record, bringing the global total this year to about 13,000, according to reports.
But critics quickly jumped on another piece of news: GM’s suspension of Volt production for four weeks.
Dying or not this is not good news for the Volt. Very few are buying these cars. And those who do are not buying them because they are great cars. They’re buying them to make a statement. Or for some other reason. And that is the problem for the Volt. When a vehicle is selling well you hear the rank and file complaining about all of the overtime they have to work. To keep up with demand. While demanding their factories add another shift. But when you’re only selling 13,000 a year (just over 1,000 a month) you can shut down for four weeks. And no one will even notice.
But the completely electric Nissan Leaf has not fared well either. It has a goal of 20,000 units this year, which the Detroit News says is increasingly unlikely.
Another problem GM faces is competition. It’s no longer the only plug-in hybrid on the block. Ford has its C-Max Energi plug-in hybrid ($32,950) and Toyota is now selling a Prius plug-in hybrid ($32,000)…
GM says one in three Volts are now sold in California. And there are reasons for an uptick in Golden State sales. The Volt earlier this year finally qualified for the California provision that allows environmentally friendly cars to use restricted carpool lanes whether they’re carrying passengers or not.
And the Chevy Volt sells for $40,000. People just aren’t demanding these cars. Because they’re expensive, small cars. And the people that are buying the most Volts are in California. Just so they can drive in the carpool lanes. Where commuters will pay almost any price to avoid that awful Californian gridlock. Especially if you don’t have to drag along another body with you.
The federal government poured a lot of money into the Chevy Volt when they bailed out the UAW pension fund (aka the auto bailout). This was the car of the future. Because President Obama said so. And proclaimed the new GM would sell a million Volts a year. And GM would use the proceeds from these sales to repay the taxpayers. Not only have they grossly missed the president’s sales target. The government interference in the company (by making them build a car that no one demanded) has caused the stock price to fall. While the government still owns a substantial amount of shares. Pushing any repayment of the taxpayers’ money further out in the future. If there is any repayment at all.
It just may not be time for the plug-in hybrid. Based on these sales numbers. So it probably wasn’t wise to make it such a big part of GM’s turnaround plan. Or to pour so much taxpayer money into it. Worse, GM is not positioned any better to compete in the market place. Which is why their plug-in hybrid is the most costly one in the market place. And will be for the foreseeable future. Until they have a true bankruptcy reorganization.
Tags: bailout, Bankruptcy, California, carpool lanes, Chevy Volt, GM, plug-in hybrid, taxpayer money, UAW, Volt
Week in Review
Here’s a word of advice. If you see one of those fascinating new all-electric cars in the parking lot when you’re out shopping don’t park anywhere near it. Just in case (see Fisker Issues Second Recall of Electric Car by RANDY KREIDER posted 8/20/2012 on ABC News).
After the second of two mysterious fires in a Karma sedan, the government-backed electric car-maker Fisker has initiated a voluntary recall of its luxury vehicles…
As first reported by Jalopnik.com, the owner found the vehicle burning in the parking lot when he returned from shopping. At the time, the Woodside Fire Department said the immediate cause of the blaze appeared to be “heat from powered equipment,” and firefighters cut the car’s battery cable after putting out the fire. Woodside Fire Chief Dan Ghiorso told ABC News that the origin of the fire appeared to be inside the engine compartment, though Fisker said in a statement that it was determined to be outside the compartment in an area “forward of the driver’s side front tire.”
Ghiorso said Monday that he did not dispute Fisker’s new findings about the origin of the blaze. The fire did not cause any injuries but did cause damage to an adjacent vehicle, according to the Woodside Fire Department.
The fire is the second mysterious blaze in a Fisker Karma in 2012. Earlier this year, a Fisker Karma parked in the garage of a Sugar Land, Texas home caught fire, destroying a portion of the residence. Fire officials blamed the electric vehicle for the fire, according to media reports, but Fisker contended that neither the car nor its battery had anything to do with the fire, since the car was unplugged at the time of the fire and the battery pack was intact and still working after the blaze.
In March, another Karma broke down in the middle of a Consumer Reports road test, a failure that Fisker later said was due to a faulty battery.
More than 250 Fisker Karmas, out of the more than 1,000 that the company says are on the road, have been subject to a recall over the last year due to problems with the cars’ lithium ion batteries that could have led to fires in the $102,000 cars.
Gee, I’d hate to be the person who invested in these expensive cars that seem to be having so much trouble.
In 2010, the Department of Energy awarded Fisker a $529 million green-energy loan, in part to help purchase a shuttered General Motors plant in Delaware, where it predicted it would one day employ 2,000 auto workers to assemble a clean-burning gas-electric family car, known as the Atlantic.
Fisker collected nearly $200 million until February this year, when the government froze the loan because the company was failing to meet the government’s milestones. Most of those federal funds went into bringing the Karma, which Fisker assembles in Finland, to the U.S. market.
Oh. I am the person investing in these expensive cars that seem to be having so much trouble. Makes sense. Obviously the technology is so questionable that they couldn’t build these cars with private money. Like auto makers can build those cars that run on gasoline with private money. Because that technology works. Unlike these all-electric cars. Based on these electric cars bursting into flames or breaking down or being recalled.
I’m not sure how this creates U.S. jobs. Except at the port that unloads these cars from ships. Unless the Obama administration is counting on hiring new firefighters to put out these car fires. Firefighters do belong to a public sector union. And the president does support public sector unions. After all, he did say the private sector was doing well. It was the public sector that he wanted to see some hiring in. So maybe this was the grand plan all along. Burning cars to support the call to hire more firefighters.
Company executives began hinting in February that Fisker would reconsider its plan and look for a cheaper place to build the Atlantic, despite the federal funding it received to build in the U.S.
“If Fisker no longer gets government monies, then obviously we are in a place where other options are open to us and have to be considered from a business perspective,” Roger Ormisher told ABC News in May…
Ormisher also said that negotiations with the DOE were ongoing. “We’re hoping for a conclusion fairly soon,” he said.
They don’t want to build in the U.S. with UAW auto workers. Unless they get a government subsidy. To offset the high cost of UAW labor. Because they don’t want to go bankrupt like GM did from the high cost of UAW labor. They’re still trying to negotiate further subsidies from Loans-R-Us. I mean, the Department of Energy (DOE). And they really like those loans. Because they come with a wink. They know they don’t have to pay them back. Especially if they pull a Solyndra and go bankrupt.
There has to be a cheaper way to create jobs in Finland. Then again, why should we even be trying to create jobs in Finland in the first place? Perhaps it’s time we take junior’s credit card away. For the DOE just doesn’t appear to be responsible enough with our money. And another thing, why do we even have a DOE? What? Are they the ‘parsley’ of government spending? Something that looks nice on your plate but has no real value? It would appear so. Perhaps it’s time we stop spending money on parsley. The government should impress us with substance. Not appearances.
Tags: all-electric car, Atlantic, auto workers, battery, bursting into flames, create jobs, Department of Energy, Finland, Fisker, Fisker Karma, government subsidy, high cost of UAW labor, jobs, Karma sedan, UAW, UAW auto workers