Was Market Fundamentalism Bailed Out?

James B. Stewart complains (The New York Times Business Day, January 14, 2012) that the Obama administration’s actions toward G.M. demonstrate why the government should not own shares in public companies. It has a conflict of interest as an owner and regulator. The U.S. government still owns about 30% of the shares.

Stewart’s analysis is tone deaf and ideologically tendentious. His first example of alleged conflict of interest is that the National Highway Traffic Administration pressed G.M. to fix its potentially flammable batteries in its star product, the Volt. Stewart comments “Rest assured that if Bain Capital owned G. M. it would not be subjecting the Volt to severe safety tests”! He does agree that the government did the right thing to hold G.M. accountable just as it would any other car company that it did not own, but he believes that this conflicts with the government’s obligation as an investor to maximize shareholder value regardless of costs to others. This is a massive assumption – though one that the U.S. Treasury has always maintained in its public testimony about the bailout – that the government is just like a private investor when it owns shares and should not care about the public interest. What, pray tell, was the purpose of the bailout by Bush and the restructuring orchestrated by Obama if not overriding normal capitalist principles in order to serve the public interest? President Obama specifically overrode the advice he received to save Chrysler (and sell it to Fiat).

May not the bailouts actually achieve both public and private interests? No, Stewart argues. His next example of a government conflict of interest was that the Obama administration should have sold out all of the taxpayers’ G.M. stock when the company went public in the fall of 2010 when the price was about $33 a share because it’s about $24 today, a 25% drop. He dismisses the argument made at the time that dropping hundreds of millions of government shares on the market would undermine the public offering. Instead, he claims that the decline in the share price since then is a result of the continued taint of public ownership, a.k.a. the Wall Street Journal’s talking point about “government motors”. Investors undervalue the stock because they can’t count of the government investor to act like a real investor, Treasury be damned. Yet Ford, which was the only one of the Detroit Three not to participate in the bailout, has seen its share price drop from $16 a share in late 2010 to $12 today, a 25% drop. Could there be something else going on in the world economy?

Stewart also claims that the terms of the bailout that limit the pay of the top executives have inhibited G.M.’s ability to attract top corporate talent. He notes that the Obama administration approved CEO Akerson’s pay of $9 million, but quotes Akerson’s comment that he would like higher pay for top management. What a surprise! Wouldn’t we all like to be in a position to make decisions about our own pay? Stewart may have forgotten the years of bloated management compensation that was unrelated to performance, but the rest of us have not. We might imagine that the talent pool is a bit deeper and that there are many auto designers (for example) who would work for mere millions. In any case, G.M. says that these shackles have not stopped it from assembling a top flight team.

G.M.’s renewed taste for luxury products may be a perfect match for the market fundamentalism that also survived the government’s rescue.