Government intervention in the 2008 General Motors and Chrysler bailouts

GM Chrysler Bailouts

Government Bailouts of Chrysler and General Motors

An Examinations of the Factors that Led to the Bailouts, the Terms of the Bailouts, as well as a Discussion of the Current State of the Arrangement

The global financial crisis of 2008 worked to decimate many sectors of the economy. The government responded with quick action and intervened as they saw fit. However, from the beginning, there has been a debate over whether it was the right course of action for the Treasury and the Bush and Obama administrations to use the 2008 Troubled Asset Relief Program (TARP) money to support the struggling auto manufacturers. The financial support to General Motors and Chrysler, which was actually made in part by both administrations, represented a large financial investment on behalf of the United States tax payers. Although the results of this intervention are heavily contested, it was found that there is sufficient evidence to support the conclusion that the bailouts were at least moderately successful.

Introduction

Although the foundation for the global financial crisis was constructed well before 2008, it was in this year in which the recession began to clearly emerge. Since the economy is composed of a series of interrelated factors, it is difficult to specify a conclusive root cause of the crisis. Some researchers claim that deregulation is the ultimate cause while others blame the subprime housing market or the creation of derivatives as financial trading instruments for example. However, despite what might be the cause of the financial crisis, the effects of the crisis were far clearer. Many companies and individuals were quick to file for bankruptcy protection and the wave of defaults had ripple effects across the entire economy. Furthermore, even those who were financially stable were unlikely to make any major purchases as consumer confidence plummeted.

One of the most troubling implications of the financial crisis was the potential collapse of the "Big Three" automobile manufactures. General Motors had built a virtual car empire over the course of forty years and Ford was had developed success in many individual market segments such as in the number one company in terms of sales in consumer trucks. Chrysler was already weakened by a failed attempt to merge with the German Benz company. As the economy began to crumble, it became clear that the automobile industry was subject to vast implications. Since the industry was one of the cornerstones of the entire economy, it was deemed necessary to step in and re-capitalize these companies so that they did not become insolvent.

Although these can be perceived as a reactive step that was necessary to bailout the industry can prevent further economic collapse, from the taxpayers perspective it could be considered an investment in which they should be entitled a return. The government had to ponder whether the move could also be considered a sound investment before investing over thirty billion dollars of taxpayer money in a company that was as unstable as the rest of the country. As a result, the government's intervention came with a whole slew of strings attached including a specially appointed "Car Czar" whose job it is to oversee the investment activity on behalf of the tax payers.

GM's Role

General Motors has long been the largest auto manufacturer in the world, however after the recession started taking its toll the company's number one position was snatch by Toyota (Marr, 2009). GM has a conglomeration of brands and it had ten different product lineups at the time. The product line offers a wide range of products and targets an even wider array of consumer market segments. Despite GM's history and its immense size, it was no way immune to the recession. In fact, if anything the company's size made it more vulnerable to the economic turmoil. The company had become dependent on high volume sales to support its operations.

General motors was fairing relatively well up until the economic recession. Much of their sales success could be attributed to growth in developing economies as well as growth in Europe. The company actually had many record breaking performances by many of the different brands in several key markets (Neff, 2008). At this point the company was running neck and neck with Toyota in regards to total worldwide sales. However, since GM was utilizing a heavy growth strategy, Toyota turned out to be better positioned to weather the economic storm and gained the number one position shortly after.

When the recession emerged, most notably the credit crunch, consumer demand was devastated and this worked to point out many of the weakest links in GM operations. GM had comparatively inflated car prices in regards to competitive value which was at least partly due to the high wages that the company paid for its domestic workers (Vohwinkle, N.d.). Furthermore, the CEO's and executive board were receiving exorbitant compensation as well as a significant amount of spending on high risk projects that were unnecessary at best. Although investments in fuel efficiency and manufacturing development were deemed credible, many projects that were not related to these necessary developments were often wasteful.

When GM was effectively forced to ask for assistance in front of congress, it was estimated that it would require roughly thirty billion dollars for the company to stabilize its financial situation. However, the government did not grant the money without many strings attached. For example, General Motors was requested to close nine factories and also slash roughly two hundred thousand people from the payroll. Furthermore, the manufacture had to drop Pontiac, Saturn, as well as Hummer which was eventually spun off to Chinese owned group (Smith, 2009).

Current State of the Deal

There are many competing frameworks in which to evaluate the success or failure of the government's interventions in the automotive industry. On a strictly financial measure, the investments made to the private sector have yet to payoff to the public. The current stock prices would need to roughly double in order to match the investment made so that tax payers would break even (Isidore, 2012). Therefore, from a strictly short-term economic perspective, the companies still represent a several billion dollar lose for the public sector's investment. Many conservative pundits have argued that the deal was certainly a bad investment for the American public on these grounds.

However, there are many signs that point to a successful intervention. For example, in 2011 all three of the Big Three domestic automotive manufactures posted a profit; GM's profit reached record levels (Isidore, 2012). Since all three companies were on the verge of disaster, it is reasonable to argue that the intervention helped to save the domestic automobile manufacturing industry; or at least helped to prop up its current level of success. There is really no way to know the extent of the devastation that would have occurred on the economy if anyone of the companies were allowed to fail. Unemployment would have increased, tax revenues would have decreased, and GDP would have also suffered. Therefore, given these companies recent level of profitability, it is likely that the intervention had a positive impact on the economy as a whole.