Wednesday, May 09, 2012
Bailout of GM Costly for Taxpayer: “Too Big to Fail” Is Failure
In 2009 the Obama Administration awarded General Motors (GM) with a $50 billion bailout. It was argued by both the Bush and Obama Administrations that GM, with 202,000 employees in 157 counties, was “too big to fail.” Not only did the bailout generate what we economists call “moral hazard,” (investors taking on too much risk due to federal government backing), it also cost taxpayer billions. Emerging from bankruptcy in November 2010, GM stock was initially sold to investors (Initial Public Offer) at a price of $35. Last Friday the stock closed at a price of $22.36. Thus at this point in time, the U.S. taxpayer has sustained a loss of $18 billion. During this period that GM stock dropped by 36 percent, the overall stock market expanded by 18 percent. So not only is the federal government investing public money in private businesses, it is doing it poorly. GM shares have fallen to less than half the $53 price that the government needs to break even. Much of GM’s difficulties can be traced to federal meddling and requiring GM to produce vehicles that Americans have shunned. For example since it went on sale, the GM hybrid, the Volt, at a sales price of $41,000 and a U.S. federal tax credit of $7,500, has cost U.S. citizens $250,000 for each unit sold according to the Mackinac Center for Public Policy. Thankfully GM suspended produc-tion of the Volt in March 2012. For the sake of GM and the U.S. taxpayer, the U.S. Treasury should sell its stake in GM and “get out of the way.” Ernie Goss.