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GM takeover part of broad federal role
Capping a series of bold government actions to rescue failing corporate giants, the White House has won approval of its restructuring plan for General Motors Corp., putting the government on track to take ownership of the storied automaker by the end of the week.
The takeover, which is the most extensive federal intervention into the operations of a major industrial company, follows in quick succession a government-assisted bankruptcy reorganization of Chrysler LLC, the assumption of partial ownership of two of the nation’s biggest banks — Citigroup and Bank of America — and the seizure of mortgage giants Fannie Mae and Freddie Mac as well as insurance goliath American International Group Inc.
William Boyes, an economics professor at the W.P. Carey School of Business at Arizona State University, estimates that the government now owns or controls businesses that generate about one-third of U.S. economic activity.
Some economists say the free-market system is in danger. But almost all agree that the government’s heightened presence in large sectors of the economy, even if necessary, will change the way markets and businesses function for many years to come.
“I didn’t think I would ever see the United States move to a primarily government-controlled economy, and its happened in just a few months,” Mr. Boyes said.
Mr. Boyes is among economists who say GM and some of the large banks should have been allowed to fail because of the poor decisions and management that led to their insolvency.
“The auto companies should have been able to file bankruptcy at the very beginning so contracts and other inefficient setups could have been resolved” without government intervention that led to a deal that disproportionately favors GM’s autoworkers union, he said.
But other economists and President Obama insist that the government got involved only reluctantly and its intervention was necessary to prevent the greater harm to the economy that would have come from thousands more lost jobs in the middle of the deepest recession in modern times.
John Wolkonowicz, an economist at IHS Global Insight, said the government had to become GM’s sponsor and rush the case through bankruptcy court to prevent the recession from getting worse this summer.
“A prolonged GM bankruptcy could significantly harm the U.S. economy just as it is starting to show some signs of recovery,” he said. Under the government’s plan for a quick reorganization, “GM has a high probability of eventually becoming a sustainable, successful business,” he said.
Mr. Wolkonowicz said GM’s image problems were only slightly worsened by the government takeover and bankruptcy. To be successful, he said, GM will have to overcome its mounting perception problems by winning over younger buyers with a new lineup of cars such as the Chevy Volt, Cruze and Camaro.
The New York bankruptcy judge who approved GM’s sale to the government Sunday night largely agreed with the White House’s view that a taxpayer takeover was the only alternative to shutting down the company that is both the heart of the U.S. auto industry and the entire manufacturing sector.
“This will prevent the death of the patient on the operating table,” U.S. Bankruptcy Judge Robert Gerber said in a 95-page opinion that he wrote over the long Independence Day weekend. “GM cannot survive with its continuing losses … and without the government funding that will expire in a matter of days.”
Moreover, the judge rejected arguments by a small group of GM bondholders that the company could have survived a normal, prolonged bankruptcy reorganization, which for such a large corporation would take months or years.
“As nobody can seriously dispute, the only alternative to an immediate sale is liquidation — a disastrous result for GM’s creditors, its employees, the suppliers who depend on GM for their existence, and the communities in which GM operates,” Judge Gerber wrote. “In the event of a liquidation, creditors now trying to increase their incremental recoveries would get nothing.”
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