How Did GM Pay Back Its Bailout So Fast? Well, It Didn't... | Hacker News Reader

How Did GM Pay Back Its Bailout So Fast? Well, It Didn't...

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119 pointsmcantor62 comments

If you lend me $50 billion from your slush fund and let me convert most of it into worthless stock, I will then turn around and pay off the balance with interest.

We have too much auto building capacity for this economic environment and the least competent should have been shut down. That's how the rest of the economy works.

GM got a sweetheart deal for totally political reasons while thousands of other companies employing many more workers being paid realistic wages and benefits went bankrupt.

Do the rest of us get paid to sit on our asses at "job banks" playing cards when we bet on the wrong employer or career? What is so sacrosanct about this particular work or group of workers?

"thousands of other companies employing many more workers"

Ok so what's your short list of companies who employ roughly 250 thousand workers (and effect countless more) that could have used a bailout as well?

What about a large number of smaller companies who employ the same in total? Or better yet, let companies fail, let the citizens keep their tax money to spend in the economy as they see fit.

How do you handle the World Trade model where foreign governments have no issue propping up their large industrial companies hit by recessions (companies that would also benefit from the decrease in your countries industrial capacity)?

that's their business. if they wish to subsidize the production of products so that we pay less, let them. It has never been a path to real success.

all that sort of thing does is build up dependency on the government and an insulation from the actual marketplace. That is more GM's problem than its solution.

In the past it has been a path to real success, and consumers ended up paying more because of it.

One example would be the Japanese electronics industry in the 60s-70s, which was subsidized until it broke the back of US competition. It then reaped a good profit for a long time before other countries caught up.

(I doubt that GM could do this, at least not without a lot more money. But examples of "successful" subsidization programs to strategically promote industry do exist.)

I think they also had lower wages, statistical process control, concurrent engineering, the Taguchi method, the five why's, just in time manufacturing and many other innovations going for them as well. You can't say their success was due to subsidies without eliminating the effects of all of these other things.

no one can use a bailout. my point was that we all need to be producing goods and services people are willing to pay for or go find something else to do.

I find I can argue either side here. If GM closes a single auto plant, that does have a significant impact on that locale because so many people are out of work in a single stroke (see PGH when the steel industry died). 1000 small businesses shuttering their windows across the country still leaves quite a few people unemployed, but the ripple effects may not be as debilitating to each community.

When we make decisions and they don't work out, we must bear the consequences. We choose where to live and what work to do.

Its a shame but its not a justification for making other people, who nothing to do with making those decisions, suffer the consequences.

I agree--I was simply exploring another side to the argument.

Communities are a means to an end. If a manufacturing plant town in Michigan loses a GM plant, let the people move out to other communities where they need to hire people. Don't tax successful communities to prop it up. We've had ghost towns in this country before.

Most of them are barely educated, have families, and vote.

Your post expresses valid frustrations about the way the bailouts were handled, but in this case I have to disagree with most of what you're saying.

Think back to the way things were when GM was on the verge of declaring bankruptcy. The housing bubble had just burst, unemployment had shot up, etc. If you had allowed GM to go under in those conditions you would likely be facing a full-on depression in places like Michigan. So the reasons for this bailout weren't all political. At least in the case of the GM bailout the taxpayers got something in return for their money - they got control of the companies, which wasn't even an option politicians were willing to discuss during the bank bailouts.

Yes, GM's arrogance is frustrating, but in this case the people are in a position to do something about it if they felt strongly enough. You are the majority stock owners at GM - write your senator and make sure GM's behavior is aligned with your interests. One thing I would suggest is pushing for GM to be heavily involved in the expansion of the US railroad system - something that will happen, but is currently a job that's mostly going to be shipped out to companies in Spain. That's probably more important than the ad.

control of this company is worthless. anybody could have picked it up in bankruptcy court. Its not worth 1 billion let alone 50

This would probably be funny if it wasn't my tax money that paid for their incompetence. Quick poll: How many founders on HN have had their failed startups bailed out by the Feds? (I suspect I know the answer)

well, one can't conflate a failed business with network effects. arguably gm stopped being just a business a long time ago, and is more an army of subcontractors. perhaps managing these kinds of arrangements, and dealing with complexity and large blocks capital in the global market, is what we should be talking about, imho.

It's more aptly described as an army of union workers who contribute boatloads to political parties.

It may be more efficient for the feds to cut out the charade. They should close down all the union shops and give all the union workers full welfare for life. The resulting bill might be cheaper than the economic distortions caused by political policies that favor unions in the marketplace.

Full welfare for life? You mean Social Security and Healthcare? Perhaps we just need to make those programs work properly. If we also had some basic legal limits on the way salaried and non-salaried employees work and how much of a corporations tax-deductible costs can go to C-level salaries instead of everyone else's salaries, much of the need for unions would go away.

Unions have outlived their usefulness in the American economy. Today, their primary effect is to destroy and bankrupt everything they touch. GM paid many workers full salary to do nothing for years because their union contract wouldn't allow them to fire people. I'm sure those "workers" were happy with what the union did for them. But those of us who don't get a sweet union deal have to live with a bankrupt state of California that can't negotiate their union labor contracts, a broken school system run by the country's most powerful union that resists all reform (except "more money for schools"!), bankrupt unionized automakers, a stale unionized postal system that is going broke, and even union grocery stores with long lines because the union resists putting in automatic checkout machines that they fear would take their jobs.

And when the unions inevitably kill their host, they still aren't made to suffer. The federal government steps in and guarantees their pensions and salaries. Imagine what kind of incentives that gives the union leaders in future negotiations. Oh, and union workers will have lower taxes on their health insurance than non-union workers under the Obama health care plan even though union workers make more money on average, just to rub a little salt in the wound.

In 1900, unions were a great idea. Now they are poison.

> "Unions have outlived their usefulness in the American economy."

I used to think this way; even having grown up in and around Detroit. But it only takes a few years of actually paying attention to continued corporate abuse of employees -- numerous cases of flagrant violations of labor law and regulations -- to realize that's completely wrong.

All unions are not the UAW or Teamsters any more than all companies are Enron and Merrill Lynch.

So the alternative is unions which empower the opposite form of abuse? It seems that a balance is the problem, one is always stronger than the other.

I agree, in general, as a former Teamster working for UPS. I moved out of the union and became a supervisor for UPS. It was hell, where I couldn't penalize any worker for showing up late, for not working, for leaving early. Some workers could not be motivated, period, as 'senior' union employees told them the tricks that made it so they didn't have to work hard. Meanwhile, my trucks were late to pull, meaning I got my ass chewed out, because I regularly had 3/10 employees skip work. The only way I could get things going was to literally bribe them with popsicles (hot warehouse in summer) and energy drinks from my own pocket $$$. The worst was having to give skilled positions to the most senior, rather than the most capable. Made for a nightmare operating environment.

However, my dad is a union employee - he works on elevators. It's a small union, and it doesn't have a bunch of 'no penalization' bullshit, and no seniority promotion clauses. The benefit it offers are a standardized health care package, so he can keep the same healthcare and retirement regardless of employer (there are only a few elevator companies anyway). The union also guarantees overtime. He can still get canned if he starts skipping work, doesn't perform etc, it just takes legitimate documentation to have happen.

There are upsides and downsides, but I believe a well run union is a good thing, but in general unions are not well run and are in actuality, terrible for the private sector.

Unions have outlived their usefulness in the American economy.

Tell that to the workers at Upper Big Branch Mine.

Maybe they put their entire fate in the faith of the union, whereas under normal circumstances, they would have used their heads? It's an important question.

It was a non-union mine. http://www.statejournal.com/story.cfm?func=viewstory&sto...

But those of us who don't get a sweet union deal have to live with a bankrupt state of California that can't negotiate their union labor contracts, a broken school system run by the country's most powerful union that resists all reform (except "more money for schools"!), bankrupt unionized automakers, a stale unionized postal system that is going broke, and even union grocery stores with long lines because the union resists putting in automatic checkout machines that they fear would take their jobs.

All but your very last example[1] are unionized public employees. They work for you and me, the taxpayer. I can't even begin to comprehend how unions in this sector have ever been a benefit to the economy or the public.

I find it outrageous that it was ever allowed to happen, since, evidenced by your own viewpoint and conclusion, it has utterly eroded what unionization stands for.

I agree that unionized industrial labor was a good idea in 1900. I don't think unionized public employees were ever a good idea. Isn't this kind of corruption the stuff of revolutions? "Taxation without representation" is what it appears to amount to.

In the private sector, unions might still make sense as a hedge against corporate exploitation of workers, as other commentors have pointed out. They also might not. Your grocery store example I've seen here in the Bay Area, and the market is quite unforgiving to a business with such slim margins.

[1] The automakers are a pretty muddled situation, though the US government now owns enough of GM that I'd consider it little different from the postal service.

> ... and how much of a corporations tax-deductible costs can go to C-level salaries instead of everyone else's salaries, much of the need for unions would go away.

Something like that was already instituted under Bill Clinton - corporations can't deduct more than $1 million of an executive's salary. That was actually a big part of why compensation shifted to stock options - I don't think that was a good shift, myself. CEO's and high level executives now make a lot more short term decisions than they used to when they got, say, $6 million in salary and a dramatically smaller option pool. Back then their main concern was keeping the business running smoothly to ensure their jobs. Now it's all about getting the stock price up as much as possible in the short term, often with disastrous results. Also, executive compensation actually went up as a result of the shift to stock options... it's ironic that the government trying to limit executive compensation helped stimulate an increase in executive compensation. Unforseen secondary effects can be funny like that.

> ...much of the need for unions would go away.

Much of the need for unions has gone away, but unions do not voluntarily close shop. Do you think they would do so? It hasn't happened yet...

Except that the non-failed auto companies have no problems operating in union states or nations. Many of GM's own in-the-black business units are in Europe.

"The unions" didn't cause the failure, nor the bailout.

2/3 unionized auto makers in the US failed and had to be nationalized in order to survive. (Ford survived largely on the principle that you don't have to outrun the bear, just your hunting companions.) The foreign, non-unionized auto makers have no problem keeping plants open in the US and turning profits.

It may be more affordable to support a unionized workforce in Europe just because European countries have more generous welfare systems, or because European unions own stock in the company and have a financial incentive not to completely destroy the host. Of course, UAW resisted that level of responsibility in the GM and Chrysler bailouts.

American industry is failing primarily because safety standards are higher than abroad.

GM failed because they designed shoddy cars. The Unions had nothing to do with that (especially given that most of the union workers were rank-and-file factory workers who built exactly the shitty cars they were told to.)

> GM failed because they designed shoddy cars. The Unions had nothing to do with that

If the overhead of dealing with unions adds some amount to your marginal costs, and you have to sell your vehicle for a competitive price, then you have to find a way to make a cheaper car than your competitors.

A cheaper car can happen through lower material costs, less R&D, etc, all of which lead to "shoddy cars."

I read somewhere that GM's union commitments added about $2,000 to the price of a car. Meaning that if you buy a GM automobile, $2,000 is going to union-related stuff, rather than buying extra features, better quality, a longer warranty, etc.

I agree.

It's not the union's fault the American auto industry failed to adopt using more universal/standard parts across their range of vehicles, as opposed to favoring proprietary parts for each specific model (with the exception of engines). Only now, post-gov take-over, are they implementing these practices that should have been in place 20 years ago.

Their board also structured union benefits that favored short-term cuts over long-term costs.

And when times were good, GM placed its engineering efforts on Trucks and SUVs, and when gas was cheap. Unfortunately, they let everything from compacts to their luxury sedan lines decay.

GM's failure, to me, is more of a case of rotten corporate culture than a lesson against unions.

"American industry is failing primarily because safety standards are higher than abroad."

Then why can Toyota and Honda successfully build cars in the US?

Well we've seen how overrated Toyota actually has been -- in terms of their safety record etc.

Bull. Toyota's mistake could have happened to anyone - all of the work relating to individual parts are done by subcontractors, and you would be surprised at how many subcontractors all of the large manufacturers share.

While the problem is certainly inexcusable, the gigantic hate-on that Toyota went through from Congress and the general public is mostly political. The anti-Toyota and andti-import sentiment is largely driven by politicians trying desperately to raise the desirability of American cars by spreading FUD about Japanese ones.

Exactly.....I've owned Toyota's exclusively for about 20 years now, with no problems. And I've never bought new, always used. Anyone that says American quality is comparable to Japanese is simply making it up. It's not that Americans can't do it, it's just that they don't.

Toyota had a massive recall, congressional hearings are standard for an issue of that magnitude and even you readily admit "the problem is certainly inexcusable."

I'm amazed you were uprated for real FUD with "politicians trying desperately to raise the desirability of American cars by spreading FUD about Japanese ones" with very little evidence, other than ill-will toward all U.S. politicians.

Pols grandstand during hearings, that's what they do -- the same American pols had zero problems grinding U.S. car makers into the dirt before the Toyota issues, in hearings. (Even Ford, which did not get a bailout was ground down in the Big 3 hearings).

I'd say any of the nationalism was driven far more by the media, who enjoy schadenfreude for ratings.

Toyota was targeted with cause as you agree, _and_ no other Japanese (or other foreign) car cos were affected although you push your FUD to the affect that Japanese carmakers were all targeted and not Toyota specifically.

Plenty of Toyotas are manufactured in the U.S. with U.S. work force http://www.autonews.com/article/20090112/ZZZ_SPECIAL/3011199..., and thus have the protection of the congress critters you deride and governors where those plants are located even wrote letters to congress in support of Toyota -- again going against your assertions of U.S. pols attacking Japanese auto-makers.

Further, the "cash for clunkers" in the U.S. did not discriminate against vehicles by company origin or manufacting location, although politicians could have tried to push real policies to affect sales by designing requirements to make U.S auto-makers more favorable....something that would hold tighter to your thesis.

Interestingly Japan did have a similar "cash for clunkers" program, but no U.S. makers qualified, b/c of the rules for fuel-efficiency http://www.bloomberg.com/apps/news?pid=20601209&sid=ar3R... . The U.S. automakers didn't qualify fair and square, However, of course they issued complaints and wanted examinations to ensure they had a shot at Japanese subsidies.

"GM failed because they designed shoddy cars. The Unions had nothing to do with that..."

http://www.thisamericanlife.org/radio-archives/episode/403/n...

I was hoping someone would mention the NUMMI story! I think it points out how important it is to create the right "culture" for a business.

> " The Unions had nothing to do with that"

Disagree. I've worked in that industry and the amount of union pressure to resist automation (read: loss of jobs) is intense. While Toyota, non-unionized as it is, automated the shit out of their production processes (thereby increasing reliability, IMHO the primary cause of their victory over American cars), GM was stuck with a far more manual labor force.

I've seen first-hand the failure rates between parts built by hand vs. built by machines. It's night and day (think 5-10x higher).

This is arguably true. It seems that a big reason for the GM bailout was keeping the union workers employed, and keeping business going to the parts suppliers.

Even so, how does this affect the bigger question?

> This is arguably true. It seems that a big reason for the GM bailout was keeping the union workers employed, and keeping business going to the parts suppliers.

And to keep the flow political contributions from unions into the politician's coffers.

My failed startup didn't get a bailout, but two of my ongoing businesses each got $35k at 0%, with a 6 month deferral, which was a pretty good deal.

how'd that work? are SBA loans easier to qualify for now or something?

http://www.sba.gov/recovery/arcloanprogram/index.html

hm. thanks. (doesn't really help me; the downturn has caused me the 'too many customers' hardship, if anything. I think that's kindof stretching this 'hardship' definition.)

I feel the same way about the Iraq war.

"The nearly 5-year-old war, once billed as virtually paying for itself through increased Iraqi oil exports, has cost the U.S. Treasury $845 billion directly." [Much more now, I suppose.]

http://www.reuters.com/article/idUSN2921527420080302

Conspiracy Theory: Since the government has such a hefty stake in GM, how does it boost sales? Tarnish the current #1 vehicle maker with a federal inquiry into safety issues...

hmmm.

I totally agree. I bought a Toyota the other day.

I'm of the opinion that there are competitive-research groups under each car maker that exist for this sole reason.

Someone in another thread replied that such activity would border on the illegal, but I don't buy it.

This really is kind of silly and is people engaging in nonsense math.

GM was expected to need {X} amount of cash to remain in business. They got that, with the government converting a large percentage to an equity holding (essentially like converting preferred shares). GM was expected to quickly burn through the escrow account as they bought off dealers, closed plants, etc.

Yet somehow GM didn't burn through it. They ended up returning the cash. By every possible real way of considering it, they paid off the loan.

Imagine that your friend gave you $20 for lunch, but agreed that he'd take your iPhone 3GS in return for $17 of it. Lunch comes to $16 so you give him his $3 back immediately -- did you not just pay him back? Does the money not count because it wasn't churned through a cycle first?

Stupid math.

The problem is that it is misleading, at least to me. The way it is presented, I'm led to think that they paid back all of the money that they received from the government. So according to this article, around 50 million.

Your analogy doesn't match up:

"About $7 billion of that came in the form of a straight-up, low-interest loan. And about $13 billion came in the form of an escrow account.

So how has GM, which lost $38 billion in 2007 even as it sold 9.4 million cars, paid back its debt? It took money from the escrow account to pay back the $6.7 billion loan."

They literally used loan money to pay back loan money, and they're still in the hole for the stock part, as well as $6M of the escrow account.

>They literally used loan money to pay back loan money

Which is exactly what I said. GM isn't "in the hole" for anything, and what remains in the escrow account is theirs free and clear. The governments obviously hope to recoup their "investments" when the company goes public again, which may or may not happen.

They repaid the loan because they ended up not needing the cash. It can't get simpler than that. The only question is whether they overstated their original request, or if they really have turned around enough.

> They repaid the loan because they ended up not needing the cash. It can't get simpler than that.

However, the point stands that they received lots of other bailout money, money that they haven't repaid.

Yes, that money went for "ownership" and we can hope that is eventually worth more than it cost, but it isn't worth that now and it hasn't been returned to the US taxpayer.

Basically, we hold part of GM as collateral. If they fail, we're out the money.

Wow. This is what we refer to as "the real new math". If you're smart, you'll get on board.

> Imagine that your friend gave you $20 for lunch, but agreed that he'd take your iPhone 3GS in return for $17 of it.

Except in this case GM wasn't worth what the feds paid to buy parts of it.

How do I know? Because no one was willing to pay what the US govt paid. It still isn't.

The ownership stake is basically collateral. If they eventually make enough money, they'll pay it back and we'll release the collateral. Just like any other loan.

It's not collateral, it's an indication that, just like passenger rail, the market can't support automobile manufacturing in this country[1] so instead we'll use nationalization and massive government subsidies to save otherwise useless jobs[2].

[1] Except for Ford.

[2] Specifically, jobs belonging to unionized left-wing voters in Michigan, who need to be shored up during the upcoming elections, since they were far more in Hillary's base than Obama's during the primary.

Also, the salaries for those jobs go to union dues, which go to the UAW's political contributions, which go to the Democrats. So basically, the Democrats just voted themselves more public money. Not that the Republicans wouldn't do the same in their place, but....

I think a more accurate assessment would be:

Imagine your friend gave you $5,000 for lunch, but agreed that he'd take your Apple Newton in exchange for $4,500, in the hopes that some day people would like to buy small parts of the Newton for pennies, even though at the time of purchase the Newton looked downright toxic and hadn't looked attractive in years.

Lunch comes to $4,400 so you give him $600 back and immediately spend some of the $4,500 making a commercial talking about how fiscally responsible you are, and in response he issues a press release stating that you have paid him back early, with interest.

Meanwhile, the vast majority of people in the world somehow manage to commend both of you for your sound fiscal practices.

A small minority of people will say "wait, hang on, HE PAID $5,000 FOR A FUCKING APPLE NEWTON?"

They will be ridiculed on message boards.

And I didn't bother shoehorning it in, but it's more than a fine point that it's not even your $5k to start with.

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