Direct majority ownership in GM will obviously be tricky for the US government to manage well. But remember that Sweden was a competent manager of the banks it nationalized in 1992-93. Even France, in spite of many failures, has been occasionally successful in letting companies it controlled develop in ways that made business sense. The Obama administration has made it reasonably clear that it expected GM to restructure, so while it remains to be seen how much downsizing will be done, it is unambiguously part of the mandate. Let’s also not expect the Feds to be overly passive investors, as the experience so far with the car industry task force illustrates that this team is not shy of being hands-on when needed. At this point, and even though the magnitude of the challenge cannot be underestimated, successful management until eventual resale to the private sector is a distinct possibility.

A big mistake. To see the future, look at what happened when Great Britain started British Motors (British Steel and many others).
Overmanning. The taxpayers subsidized the excess work-force. Costly, inefficient, and uncompetitive. It took Margaret Thatcher to change the rules and eventually sell the companies. We do not have a Margaret Thatcher in sight. We have continued subsidies paid by taxpayers.

 

The best one can hope for is the Obama Administration will allow GM's executives to make business decisions guided entirely by the desire to return the company to profitability and private hands.  Given President Obama's recent history, this is too much to hope for.  Repeatedly, President Obama has made clear, sound statements of his intentions regarding further bailout funding, protecting taxpayer interests, and respect for the rule of law, only to turn around and do the exact opposite of what he declared.  He has also said he doesn't want to run an auto company.  Based on his own history, why should we believe him?

Despite reasonable misgivings, I very much hope this exercise proves successful.  America would be better off with a strong, competitive GM (and Chrysler) than either a perpetual ward of the state or for GM to go the way of Studebaker.  But GM today bears a striking resemblence to a government-sponsored enterprise in the mode of Fannie Mae and Freddie Mac.  Their long history of government interference and their long-predicted demise should give no comfort to those who hope for GM's survival as a private company. 

Will President Obama and his UAW allies allow GM to make job-destroying the chances necessary to survive?  Maybe, for now.  But what about in 2010 with an election on the horizon?  GM will be out of bankruptcy protection, the federal government is still the majority owner, and President Obama is in position to veto more plant closings and restructures.  Will he turn his back then on his UAW allies then? 

One way to short up confidence in President Obama's handling of the GM affair would be to commit to a clear exit strategy.  The President should commit, and the Congress should affirm legislatively that no further taxpayer funds will be made available once GM merges from bankruptcy, that monies lent to date will be repaid within 2 years of emerging from bankruptcy, and that within one year of bankruptcy the federal government will begin selling its ownership interest in GM, completing the sale within 3 years.   The surest way for the President not to manage a car company is for the federal government no longer to own a car company.

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Britain probably has more experience than any other country of forced nationalisation of fundamentally uncompetitive motor companies, and it is not encouraging. The history of the British Leyland group, the UK's largest at the time, was taken into public ownership in the 1970s, for many of the same reasons as GM. It was unable to produce cars that enough people wanted to buy, its manufacturing methods were below par and it had a well-deserved reputation for poor quality and obsolete design. However, its collapse would have led to large job losses that were judged politically, as well as economically, unacceptable.

A fatal dilemma was thus set up: state ownership made the group too important to fail (under a Labour government, at least) but provided no incentive to improve its competitiveness. As a result, it became a money sink, into which vast amounts of public resources were poured until the Thatcher government bluffed Honda into taking over the remains. (Even Honda was unable to rescue British Leyland in the end). Ministers set "benchmarks" and "standards" for returning the group's finances to health, but they were meaningless because the company's management knew that it was politically impossible for the government that nationalised it credibly to apply the sanction of bankrupting it. That put the management in an immensely strong bargaining position when it came to demanding fresh capital injections.

That, I think, is a greater danger in GM's case than the possibility that USG will actively seek to intervene in the company's day-to-day management. The question is whether Washington can avoid deeper intervention, not whether it will demand it. The administration has created for itself the challenge of safeguarding the taxpayer interest in GM, while at the same time promising to turn it around financially. In practice, those objectives are extraordinarily difficult to reconcile and risk being in conflict with each other.

The best hope must be that some outside bidder will emerge to take GM off the taxpayers' hands. Presumably, the company still has some saleable assets, such as some of it brand names, its distribution franchise and a few of its newer US plants - though the European operations, consistently the best-performing part of the group, will have gone. Meanwhile, the best that can be hoped is that the political impulse to avoid adding to the unemployment rolls does not lead the government into pumping yet further capital into the group. It did not work for British Leyland. Nor will it do so for GM.

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