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In downtown Oshawa, murals painted on the walls of the bus station depict the history and importance of GM to the city. (Peter Power/The Globe and Mail)
In downtown Oshawa, murals painted on the walls of the bus station depict the history and importance of GM to the city. (Peter Power/The Globe and Mail)

Driving It Home

General Motors CEO will retire knowing the bailouts were a success Add to ...

General Motors CEO Dan Akerson could step down as early as next year, says a Reuters report, and with his departure we will close the book on what was arguably the most successful industrial bailout in history.

I should caution that Akerson, says Reuters, has not given GM’s board any formal retirement notification. But earlier this year his pay packet changed and that hints at the future. A securities filing shows the CEO was not awarded any restricted stock units last year, “in acknowledgement of the possibility of his retirement before the completion of the three-year vesting period” which, says www.just-auto.com, would be in 2015. At the very latest, Akerson will surely be gone by 2015.

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Akerson, rightly or wrongly, is associated with the 2009 government bailout of GM: a $49.5-billion (U.S.) package out of Washington, and another $9.5-billion package from the Government of Canada and the Province of Ontario (figures in U.S. dollars). He sat on the board led by caretaker CEO Ed Whitacre coming out of bankruptcy, and then stepped up to the top job as Whitacre’s successor just before GM re-entered the market with a public offering in November 2010.

Since then, governments in both Canada and the U.S. have divested a good chunk of GM stock, but not all. Government officials on both sides of the border say they do not plan to be long-term shareholders and are simply waiting for the right time to sell. These governments will all lose money on the actual share sale, though how much remains to be seen.

We do know that Automotive News reports that the U.S. Treasury has booked a $9.7-billion (U.S.) loss on the sale of nearly all of its initial 60.8 per cent stake in GM – a stake now down to about 7.0 per cent. So, why would I argue that this has been the most successful industrial bailout in history? Because the numbers don’t lie.

Let’s pull up work from the Centre for Automotive Research (CAR). A Nov. 2010 study on the job loss and economic impact of the 2008-2009 automotive crisis – which was part of a much bigger global economic crisis – is unequivocal. The CAR study concluded that a “drawn-out, disorderly bankruptcy proceeding leading to liquidation of the automakers” would lead to job losses in the range of 1.3 million in the U.S. for 2009 and hundreds of thousands more in 2010.

But that’s not what happened. GM and Chrysler enjoyed the benefits of a quick and orderly bankruptcy and reorganization orchestrated by government intervention. Remember, at the time, credit markets were essentially frozen and no orderly form of bankruptcy was possible in 2009 – not without government involvement.

Critics of the bailouts conveniently forget that the sort of credit facilities needed to take GM and Chrysler through an orderly private bankruptcy proceeding – one without government involvement – were completely unavailable in 2009. Government was the bank of last resort in 2009. Without government involvement, the “worst case” scenario would have unfolded right in the middle of a global economic crisis.

“The ‘good bankruptcy’ outcome was projected to have avoided a loss of 1.28 million (U.S.) jobs in 2009, and 267,300 in 2010,” notes the CAR study, adding, “Personal income losses were expected to be $65.3-billion less in 2009, and $16.5-billion less in 2010. It was estimated that avoiding the worst case scenario provided a net government impact – in terms of changes in transfer payments, social security receipts and personal income tax receipts – of $25.8-billion in 2009 and $6.5-billion in 2010, a total of $32.3-billion.”

The CAR study goes on to point out that once Chrysler and GM emerged from their ‘orderly’ bankruptcies, automotive sector employment was strong in the first year and that continues to be the case today. Both GM and Chrysler are making money and growing today and prospects for the future look good in terms of both income and employment growth. “Had GM and Chrysler not successfully emerged, those jobs would have been permanently lost,” notes the CAR report.

As Akerson ponders retirement and governments prepare to sell the last of their shares, I understand CAR is planning to update that Nov. 2010 bailout study. I expect it to conclude the obvious: a loss on share sales in the $10-$15-billion range has been a small price to pay for saving perhaps 1.5-2.0 million middle class jobs and billions in tax revenue, not to mention savings in benefits payout and such.

“This was about a lot more than bailing out GM and Chrysler,” notes auto analyst Dennis DesRosiers of DesRosiers Automotive Consultants. “The real fear at the time was what we called the “Domino” effect. If they had failed, then dozens of suppliers would have failed. If the suppliers fail, then Ford would have failed and maybe even some of the new domestic guys. And this would have had a domino effect where virtually everyone in the market would have been negatively impacted, including tens of thousands or car dealers.”

Millions of jobs might possibly been at risk, he adds. DesRosiers also notes that the bailout set the stage for a cleanup of the balance sheets of Detroit’s auto makers, making them more competitive. Bond holders, meanwhile, took a big haircut and Detroit Three workers took their dose of medicine to tune of “compensation dropping by about $25 an hour.”

DesRosiers goes on to say, the restructuring of Detroit – including the help Ford took, though not in the form of bailout money – “resulted in a $112-billion turnaround to their collective balance sheet.” Taxpayers have paid a price but so have bondholders and employees. The pain has been shared.

Washington, Ottawa and Queen’s Park don’t get much credit for doing the right and smart thing during a financial crisis and it’s unpopular in this “hate government” era to say so. But I’ll say it: the bailouts were a good deal for taxpayers and without them, the economic damage would have been utterly unimaginable.

For the price of $10-$15-billion in stock losses, the bailout saved perhaps two million middle class jobs – though plenty of pain was spread all around. Meanwhile, restructured car companies based in Detroit are growing, adding workers, rewarding shareholders and bondholders once again and pumping billions into the overall economy.

Akerson should head into retirement comfortable in that knowledge.

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