STAFF NEWS & ANALYSIS
GM – A Sucker's Bet?
By Staff News & Analysis - August 19, 2010

General Motors back from the brink and set for $20bn flotation … Share offer comes a year after filing for bankruptcy and will allow some of state loan to be repaid … America's biggest carmaker has taken the first step towards a stock market flotation barely a year after struggling through bankruptcy, in a move that will allow Barack Obama's government to win political capital by recouping some of the billions in public money pumped into the company. GM last night filed an official application, called an S-1 document, with the Securities and Exchange Commission that paves the way for one of the largest public share offerings in US history. GM did not reveal the pricing of its shares, but the company is likely to seek to raise between $10bn (£6.4bn) and $20bn in capital. Rejoining the New York Stock Exchange, with a likely dual listing in Toronto, will help GM to shake off its "government motors" nickname. The company, which owns brands such as Chevrolet, Cadillac, Vauxhall and Opel, was rescued from oblivion by $50bn in government aid last year, and the US treasury now owns 61% of its stock. The flotation could cut this to below 50%. – UK Guardian

Dominant Social Theme: Go GM!

Free-Market Analysis: GM is going back into the markets. GM is a new and improved car company and is back on its feet again. Is there a further elaboration of a dominant social theme we could muster? Perhaps there is: "Government knows what it is doing and President Barack Obama saved the day for the company and millions of jobs as well."

Is this a fear-based promotion? In a sense it is. Without government, we are supposed to learn, the US economy might have been on its way to a terminal collapse and one of the leading industrial lights of the world (GM) might have been snuffed out. Of course in all actuality this is only a sub-dominant theme. The larger dominant social theme is "Government is good and necessary for all things including free-markets." This is patently untrue, of course, but GM is being used to build the larger mythology.

Why is such a dominant social theme necessary? Because the power elite relies on government to advance mercantilism, the process whereby ones private interests are reconfigured to carry the force of law. This is very good work if you can get it. Regulatory democracy, in fact, is all about the justifying mercantilism (without ever mentioning the concept). In a regulatory democracy, those with the most money and power can write the rules for their benefit. This allows them, in aggregate, to make more money – and to rewrite more rules. It is a self-fulfilling process. (See central banking and the Federal Reserve.)

But what of GM? GM is indeed a good example of a power elite promotion. Equity and bondholders were badly hurt in the initial bankruptcy, and the car company is surely a "work in progress." Thanks to the Internet, we have read a good deal about GM in the past couple of days. We have discovered that the rosy picture painted by the IPO apparently is not so rosy after all. Interestingly, the articles that we have read sometimes painted a slightly happier picture than the feedbacks they generated. Here are two feedbacks that we read recently in the Rochester Business Journal in response to an "RBJ Daily Report Snap Poll" on the auto bailout:

The bondholders were illegally savaged. The taxpayers and their descendants were stuck with another loan from China and Saudi Arabia. The unions were made whole and their excesses perpetuated. The president of GM was fired illegally. The nation was weakened. An orderly bankruptcy would have fixed all the problems. Now we are left with a $41,000 electric car that nobody can afford (even with the $7,000 tax break). Way to go, President Obama! —George Dounce

I've been a big supporter of the American car industry. Over the past 36 years my family has purchased many new cars. All of them have been American because we feel it's important to buy American and support the American worker. However, President Obama has once again instituted flawed policy. … Many bondholders were financially devastated. Yet President Obama substantially made whole union interests as a payback to his election at the expense of the overwhelming majority of working families in the United States. From the statistics I have seen, the total bailout far exceeds the value of these two car companies at their historical peaks. GM will never be able to repay the entire debt to the taxpayers. —John Rynne, president, Rynne, Murphy & Associates Inc.

We would guess there is considerable doubt among the American electorate (excluding those who work at GM) as to whether the bailout was a good idea or not. Many might point out that bankruptcy courts might have done the job better than government and that, in fact, that's what workouts are designed to do. Nonetheless, the Obama administration stepped in to ameliorate a crisis and, as the GM IPO moves forward, no doubt more articles will be written about GM's "comeback."

There are in fact, doubts about the profits that GM is making, or at least claiming. There are grave doubts as to whether the rest of the year will be as profitable, or whether GM is in fact fully positioned for the competition to come over the next decade. With China and India both becoming far more sophisticated industrially, we wonder whether GM and other American and European car companies will not soon have to deal with a slew of additional automotive plants and brands.

Then there is GM's announced strategy, which is to focus in large part on hybrid and eventually electrical vehicles. The trouble with this as we have pointed out previously, is that the flagship GM vehicle that has emerged from this strategy costs US$41,000 but has a range in the area of 40 miles. GM is counting on government rebates of up to US$7,000 to ameliorate the cost and the make the car more attractive, but is relying on rebates a practical business strategy. Here is a more specific comment on the subject from the Cleveland Plain Dealer:

In response to The Plain Dealer's article on consumers needing to see a personal benefit to driving an electric car, cleveland.com user boneybenny comments:

Simple math… The Volt's srp is 41,000. The Impala's SRP is 25,000. Taking off the 7500 federal rebate, the Volt still costs $8,500 more than the Impala. The Impala gets 29 mpg. At a gas cost of $3 per gallon, the $8500 saved buying an Impala would buy 2833 gallons of gas. That gas would take the Impala about 82,000 miles. If electricity was free, you would have to drive the Volt for more than 82,000 miles before breaking even on initial cost. But electricity isn't free. You might never save money by owning a Volt over an Impala.

Just on it's face numbers, not counting for the cost of electricity to keep it charged OR potential downtime from a first-generation electric drivetrain, the Volt isn't a viable vehicle over an Impala. Until the cost comes down, electric vehicles are going to be a very tough sell to anyone with basic math skills. And, electric vehicles aren't pollution free. The pollution is moved from the tail pipe of the car to the smokestack at the power plant. Nuclear energy pollutes where the spent radio active fuel rods are buried. If there's a power failure for any reason, we'd have to walk too.

It seems to us that GM is increasingly a promotion-gone-wrong (as a Green meme, anyway). The idea was obviously in part to buttress the larger global warming meme; in fact that is how promotions work: they tend to cross-pollinate for one supporting another makes all more credible. But the global warming promotion is dead-in-the-water leaving GM's announced intention to be a leading Green car-market somewhat perplexing.

No, GM does not need to make cars that offer no "pollution" as carbon pollution is evidently and obviously not the driving force behind global warming (which fewer and fewer people believe is a problem in the first place). But even assuming that carbon-dioxide emissions (and air-pollution in general) is a problem, how does anyone benefit by moving the "pollution from the tail pipe to the smokestack."

It seems to us that, and we have made this point before, that power-elite promotions tend to function on auto-pilot. That is, if they go wrong, it is difficult for the elite to reset them; they are ungainly and not easily controlled once they have "gone viral." And so, perhaps, the elite is stuck with this particular, deteriorating fear-based promotion (global warming) and there is really no way to uncouple GM from its supporting role.

After Thoughts

The result may well be a disaster for GM in more ways than one. But perhaps the elite doesn't care all that much about GM's success – being more interested in the supporting role it can play in the larger global warming promotion. Seen from this vantage point, the IPO is not so much a business opportunity as a promotional device; something to consider if you intend to invest. Ideas have consequences. It is not, unfortunately, a game.

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