By mid-December 2008, GM, the world's second largest auto manufacturer, was losing $2 billion a month. Rick Wagoner, CEO since 2000, knew that GM did not have enough money to survive much longer. The year 2008, GM's 100th anniversary, was turning out to be its worse ever. 1 Wagoner already knew GM would end the year with losses of about $31 billion. But that was an improvement from 2007 when the company lost $38.7 billion, the fourth-biggest corporate loss in history. Those losses, and losses of $1 billion in 2006 and $10 billion in 2005, meant that the company Wagoner led lost an astonishing $80 billion in four years. Wagoner was a dedicated, affable, and likable man. In high school, he had excelled in all sports but his height of six feet four made him a star in basketball and upon graduation, he was secretly hoping to be a professional basketball player.

But as a freshman basketball player at Duke University, it became clear to Wagoner that he did not have the talent and drive to be a professional athlete. Instead, he majored in economics and also began dating Kathleen Kaylor whom he eventually married. After graduating from Duke University and getting an MBA from Harvard University, Wagoner went to work for GM. He rapidly worked his way up through the company's ranks and in 2000, he was named CEO, the youngest person to ever hold that position in the company's history. Wagoner blamed GM's misfortune on a number of factors. One of the most significant factors, he felt, was the "Great Recession" of 2008 that had hurt the sales of all the auto companies, particularly when the troubled banks stopped lending money so customers could no longer get car loans.

Unfortunately, GM did not anticipate the "credit crunch," and by 2006, it had sold off a controlling interest in GMAC, the previously wholly-owned finance company that had provided cheap loans to its car buyers. After GM sold 51 percent of GMAC to Cerberus for $7.4 billion, Cerberus refused to let GMAC continue providing the same easy credit to GM's customers, which turned out to be a significant blow to GM's sales. Yet another problem was GM's labor costs. In 2008, GM was paying an average of about $70 per hour for labor.

That $70 included $30 that the worker actually received in wages, and $40 that went to fund other labor costs including the worker's benefits and pension, plus the cost of providing health care and pensions to about 432,000 GM retirees. Because GM had been operating for 100 years, the number of its retirees was much larger than those of new car companies. Toyota, for example, was paying about $53 per hour for labor in its U.S. manufacturing plants, of which $30 went to the worker as wages, and $23 went to pay for the worker's benefits and pension, but very little for retirees since the number was relatively low. In some of its plants, a Toyota spokesman said, it was paying as little as $48 per hour for labor.

But perhaps the major cause of GM's difficulties was its self-inflicted dependence on large SUVs (sport utility vehicles). Japanese car makers could make small and midsized cars for less than it cost GM to make comparable cars. To compete, GM had to lower its prices until the profit margins on its small and mid-sized cars were vanishingly thin. But during the 1980s, when gas was cheap, GM discovered that large SUVs were big hits with male customers and with couples with growing families.

Moreover, unlike its smaller car models, profit margins on its large SUVs were hefty, as much as $10,000 to $15,000 per vehicle. As its SUV sales boomed during the 1990s, GM expanded its line and eagerly converted many of its plants over to the production of the lucrative big vehicles. By 2003, the bulk of its profits were coming from SUV sales. But when the price of gasoline gradually crept upward, the costs of owning an SUV also increased causing the SUV market to slow and then to decline. In 2004, unsold SUVs started piling up at car dealerships. When Hurricane Katrina made gasoline prices soar in 2005, sales of SUVs eventually collapsed. Thus, GM ended 2005 with a loss of $10.4 billion.

Things improved somewhat in 2006, but then losses climbed to record levels: $38.7 billion in 2007, and $30.9 billion in 2008. Unfortunately, by now GM's plants, strategic plans, research and development programs, and its mindset, were all locked into the production of SUVs, and it would take years to change them. Because of its reliance on SUVs, GM had put off investing in the small fuel-efficient cars a gas-conscious public had turned to in 2005. In the 1990s, GM had developed the technology for an all-electric car, the EV1.was, in fact, the first mass-produced modern electric car made by a major car company.

By 1999, GM had spent $500 million producing the EV1 and $400 million marketing it, yet had leased only 800 vehicles. Convinced that the car would never match the profitability of its SUVs, the company stopped making the cars and in 2002, it repossessed all the EV1s it had leased and phased out the project. At the same time, both Toyota and Honda were introducing their small hybrid electric-gas engine cars into the United States. The hybrids turned out to be a commercial success and, more importantly, production of the cars allowed both Toyota and Honda to gain almost a decade of experience in hybrid technology, while GM continued focusing on its gas-guzzling SUVs. In a June 2006 interview published in Motor Trend, Rick Wagoner confessed that his worst decision during his tenure at GM was "axing the EV1 electric-car program and not putting the right resources into hybrids."

All of these problems had culminated in the $80 billion loss that placed GM in the difficult situation Wagoner knew he had to deal with in the closing weeks of 2008. With many analysts predicting that GM would go bankrupt, bankswhich themselves were barely surviving the worse financial crisis in decadesrefused to loan the company more money. At the rate it was running through its cash reserves, Wagoner knew the risk of bankruptcy was growing daily.

Given the company's dire straits, he decided that only a government bailout could save it. Government bailouts were not popular. In September, 2008, the George W. Bush administration asked the U.S. Congress to pass legislation creating a $700 billion fund called the Troubled Asset Relief Program (TARP). A reluctant U.S. Congress approved the TARP bill which authorized the U.S. Treasury Department to use the funds "to purchase . . . troubled assets from any financial institution." The "troubled assets" were millions of mortgage loans that banks had extended to home buyers who were now unable to make their monthly mortgage payments, and whose homes were worth less than their mortgages because home prices had collapsed in early 2007.

Since the homes were worth less than their mortgage loans, the mortgages could not be repaid in full when delinquent homeowners sold their homes or when banks confiscated them. Suffering huge losses, many U.S. banks were on the verge of failing as were European banks that earlier had taken over thousands of the now "troubled" U.S mortgages. Many economists predicted that these widespread bank failures would turn the deepening recession into a global depression worse than the worldwide Great Depression of the 1930s.

In spite of the looming financial crisis, many had opposed the plan to bail out the banks. A hundred leading economists signed a letter to the U.S. Congress that said lack of "fairness" was a "fatal pitfall" of the plan because it was "a subsidy to investors at taxpayers' expense. Investors who took risks to earn profits must also bear the losses." 2 Calling the bank bailouts "socialism for the rich," the Nobel prize-winning economist Joseph Stiglitz wrote "this new form of ersatz capitalism, in which losses are socialized and profits privatized, is doomed to failure. Incentives are distorted [and] there is no market discipline."

3 Nevertheless, if U.S. banks were able to get bailout money from Washington, perhaps GM could do the same. So Rick Wagoner and two GM board members flew to Washington on October 13, 2008 to meet with officials of President George W. Bush's administration. During the meeting, Wagoner summarized the precarious position of the company and asked for a loan from the TARP fund. Bush's people balked at the request, saying the legislation explicitly said TARP funds were for financial institutions so they could not be used to provide loans to car manufacturers. Turned down by the administration, a desperate Wagoner turned to the U.S. Congress.

On November 18 and 19, he and the CEOs of Chrysler and Fordthe two other U.S. auto companies were also going through difficult timescame before Congressional committees and asked for legislation authorizing government funds to aid the auto industry. Committee members, however, became angry, particularly when the auto executives admitted they had not prepared plans detailing how they would use the funds nor what changes they intended to make to ensure they could return to profitability. In the end, the three CEOs were told to come back in December with detailed financial plans for their companies.

In early December, the CEOs dutifully returned to the U.S. Congress with plans in hand and repeated their requests for financial assistance. A few days later, both the U.S. House and the Senate proposed legislation to aid the auto companies. Unfortunately, while the House approved the auto aid bill on December 10, the Senate voted it down. Without the support of both the House and the Senate, the proposed legislation was dead. Wagoner was stunned and despaired for the future of the company he had served for over thirty years.

But his despair turned to elation when he got a telephone call from the Bush administration. The administration had decided the U.S. Treasury could, after all, use the TARP funds to provide loans to GM as well as to Chrysler. (Ford had decided it could survive without government money.) On December 19, 2008, President Bush announced that the U.S. Treasury would provide GM with a $13.4 billion loan from the TARP fund, while Chrysler would get a $4 billion loan. In announcing the assistance to the auto companies, the Bush administration said "the direct costs of American automakers failing and laying off their workers . . . would result in a more than one percent reduction in real GDP growth and about 1.1 million 203 workers losing their jobs."

4 To get the money, Wagoner had to agree that by February 17, 2009, GM would hand over a detailed plan specifying how it would achieve "financial viability" and the plan had to be acceptable to U.S. Treasury officials. With his back to the wall, Wagoner agreed to the terms and on December 31, 2008, GM got a first installment of $4 billion from its allotted loan amount; it received another $5.4 billion on January 16, 2009, and a final installment of $4 billion on February 17, 2009. Many objected that bailouts violated the free market philosophy embraced by many Americans and replaced it with a kind of socialism. Republican Senator Bob Corker said the GM bailout "should send a chill through all Americans who believe in free enterprise."

5 Several Republican members of Congress submitted a resolution on the bailouts that said they were "moving our free-market based economy another dangerous step closer toward socialism." 6 By February 17, 2009, newly-elected President Barack Obama had taken office so his administration would end up finishing the auto bail-out that the previous administration had set in motion. As part of the "viability plan," that he had agreed to submit by February 17, Wagoner was to renegotiate GM's union contracts to make its labor costs competitive with foreign car makers in the U.S., reduce the number and models of cars it made, shrink its unsecured debt of $27.5 billion down to $9.2 billion by getting creditors to cancel part of their debt in exchange for GM stock, and invest in fuel-efficient hybrid and electric vehicles.

7 Wagoner had quickly entered negotiations with the United Auto Workers (UAW), GM's major union, and with creditors. But GM's creditors had stubbornly refused to reduce their debt by the amount the government wanted. In the end, GM did not reach the debt reduction targets the U.S. Treasury wanted it to reach by February 17. Nevertheless, in the final "plan for viability" it submitted to the U.S. Treasury on February 17, GM said it would cut 37,000 blue-collar jobs and 10,000 white-collar jobs, close 14 plants over three years, eliminate four of its eight car brands, cut manager salaries by 10 per cent and all other salaries by 3 to 7 percent, and shift the costs of retiree health insurance to an independent trust funded in part with GM stock and in part with debt. However, the plan added, GM would need an additional $22.5 billion from the government to continue operating to 2011.

8 The Auto Task Force Obama had put together to review GM's proposed plan was not happy with it. Steven Ratner, who headed up the task force said: It was clear to us from the "viability plans" that the companies had submitted on Feb. 17 that GM and Chrysler were in a state of denial. Both companies needed gigantic reductions in their costs and liabilities. They had way too many plants and workers for expected car volumes. And their labor costs were out of line with those of their most direct competitors . . . I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company.

9 "Team Auto," as the Obama task force called itself, spent over a month studying the plan and concluded that GM's optimistic assumptions that its market share would grow in the future, its costs would decline, and in a few years it would have positive cash flows, were out of touch with reality. On March 30, 2009, the Obama administration told the company that its plan was not acceptable and did "not warrant the substantial additional investments . . . requested."

Nevertheless, GM was given 60 days, until June 1, to try to extract deeper concessions from its creditors and was also given another loan of $6.36 billion to carry it through the next two months. Although GM continued trying to work with its creditors, the Obama task force soon realized that the only way GM would force its creditors to forgive GM's debt was by filing for bankruptcy. 10 This would give a federal judge the authority to cancel as much debt as was needed for the company to become a viable business again.

On March 31, the U.S. Treasury informed the company's board of directors that if it filed for bankruptcy, the government would provide the funding it would need to emerge as a viable company. By this time, Rick Wagoner's fate had been sealed. In mid-March, Steven Ratner asked Wagoner about his plans and he replied, "I'm not planning to stay until I'm 65 but I think I've got at least a few years left in me . . . , but I told the [Bush] administration that if my leaving would be helpful to saving General Motors, I'm prepared to do it." 11 On Friday, March 27, Wagoner attended a meeting with the Auto Task Force to discuss GM's restructuring plans.

Before the meeting Steven Ratner pulled him aside and said, "In our last meeting you very graciously offered to step aside if it would be helpful. Unfortunately our conclusion is that it would be best if you did that." Wagoner agreed to step down, and on March 30 he submitted his resignation from GM. On June 1, 2009, GM entered bankruptcy. The U.S. Treasury created a new company named "General Motors Company," and the now bankrupt "Old GM" sold its most profitable brands and most efficient manufacturing facilities to the new "General Motors Company" who used $30 billion of the government's money to buy It was clear to us. Steven Ratner.

"The auto bailout: How we did it" FORTUNE, October 21, 2009 Copyright 2009 Time, Inc. Used under license them. The creditors of "Old GM" received a 10 percent share of the new company plus proceeds from the sale of the assets of "Old GM." A 17 percent share of the "New GM" was put into a trust to pay for union retiree health care benefits; the union trust also received a $2.5 billion note from "New GM" and $6.5 billion of its preferred stock. The government of Canada, which had contributed $10 billion to bail out several GM plants in Ottawa and Ontario, got 12 percent of the new company. The remaining 61 percent share of the company became the property of the U.S. government in return for a total of $50 billion it pumped into GM.

The U.S. government also retained the right to elect 10 of the 12 members of the board of directors of the "New GM"; it was now the major owner of a car company. 12 GM was not the only firm that became a (partially) state-owned company during the financial crisis. On February 27, 2009, it was announced that in exchange for $25 billion the U.S. Treasury was taking 36 percent ownership of Citigroup, Inc., a large banking company driven to the brink of failure by the financial crisis.

On September 16, 2008, American International Group, an insurance company also brought to its knees by the financial crisis, announced that the government, through its Federal Reserve Bank, was taking ownership of 80 percent of the company in exchange for $85 billion. Many observers claimed that government ownership of companies is the kind of government ownership of the "means of production" that Marx and other socialists advocate.

For example, Robert Higgs, editor of The Independent Review, wrote that "the government is resorting to outright socialism by taking ownership positions in rescued firms." 13 And the Mackinac Center, a conservative research institute focused on promoting "the free market," published an article by Michael Winther that stated:

There are only two economic systems in the world . . . These two economic systems are generally described as "the free market" and "socialism." . . . Socialism is characterized and defined by either of two qualities: Government ownership or control of capital, or forced pooling and redistribution of wealth. . . . [T]he current bailout could be described as "super-socialism" because it involves every possible component of socialism: the forced redistribution of wealth, increased government control of capital, and even the extreme of socialism, which is government ownership of capital. Our federal government is not content to just regulate the markets (capital), but is also taking the next step of purchasing ownership interest in previously private companies.

1. In your view, should the GM bailout have been done? Explain why or why not using the ideas of the various thinkers discussed in this chapter.
2. In your judgment, was it good or bad for the government to take ownership of 61 percent of GM? Explain why or why not in terms of the theories of Locke, Smith, and Marx.
3. What possible solution/s can you suggest for this case? Expound your answer.