Friday, November 19, 2010

Don't celebrate the GM IPO yet

President Obama happily trumpeted the success of GM's IPO yesterday. But, as David Harsanyi writes, this is a total illusion.
Now, admittedly, success is a malleable concept. If by success we mean that General Motors still owes the government $43 billion -- not including that piddling $15 billion it borrowed to fund its financial arm -- and that many analysts are uncertain it can ever flourish, we're home free.

Success will mean temporarily setting aside the fact that the Treasury actually lost billions on the IPO as it "bought" GM stock at inflated prices. To break even on the freshly printed money taxpayers are "getting back" will probably mean GM needs to double in value over the next year to make us whole.

Do you feel whole? I do.

Don't worry. Not only is GM equipped with an array of unmerited advantages over companies operating successfully in the marketplace -- even without blank checks from taxpayers -- but also the IPO was exempted from federal and state anti-fraud laws just to make sure things still aren't exactly fair. (Then again, every GM success comes at the expense of someone else.)
That is what often happens in business, but government shouldn't be the one with the thumb on the scales.
Success also means that Morgan Stanley, Goldman Sachs, Citigroup and other institutions saved from extinction by taxpayers can now make hundreds of millions of dollars on an IPO from a company that only exists because of taxpayers.

It reminds me of the success we experienced the last time GM paid back taxpayers, when it utilized funds from a TARP escrow account rather than actual revenue. Paying back taxpayers with taxpayer dollars is an inventive accounting method, for sure.

And let's not forget that success is predicated on this president's strong-arming bondholders and essentially wiping out shareholders of a private company -- tearing up legal contracts rather than allowing a traditional bankruptcy. Success means shielding benefits of United Auto Workers as a reward for helping make cars that are less efficient and more expensive.

At the time, George Mason University law professor Todd Zywicki wrote that by "stepping over the bright line between the rule of law and the arbitrary behavior of men," the president "may have created a thousand new failing businesses."

Confiscating the property of investors for the common good isn't generally conducive to a healthy business environment.
The WSJ explains some more about how fragile any triumphalism about GM is.
For starters, investors yesterday were discovering that GM's prospectus for the IPO notes that because the "selling stockholder is a federal agency," sovereign-immunity doctrine may prevent claims for misstatements or omissions in the prospectus. Reasonable people can argue what the odds are of such claims, but an $18 billion IPO led by Uncle Sam is at the least unchartered waters.

Traditionally, a new company emerging from bankruptcy has to forfeit the old company's tax losses. Instead, the government will let GM exercise a tax-loss carry forward on some $45 billion of net operating losses. Translation: Taxpayers will continue to aid GM for years. Meanwhile, to help sell GM's signature "green" vehicle, the Chevrolet Volt, buyers will receive a $7,500 tax credit toward the $40,000 sticker price.

We're glad this IPO means the GM bailout hasn't turned into a huge loss for American taxpayers. We remain troubled, though, at the implications. So deep a government penetration into the structure and future of a major U.S. corporation should not be a precedent. But with a President intent on making "investments" in myriad green industries, among which we may now count the auto industry, the prospect is for more "partnerships" with Uncle Sam in other guises. There is an old and familiar term for this: It is industrial policy.