GM is profitable, but...

The national news reported on the success of GM and its latest profitable quarter. That is only one piece of the pie. I found an article from Megan McArdle, a senior editor for The Atlantic. She paints a pragmatic picture, which I couldn't have said better myself. You be the judge on whether or not the bailout for GM was a good deal for the U.S. taxpayers. 

Here are the highlights:

About $40 billion of the money that the government gave GM was converted to GM common stock. In the November IPO, the government made about $20 billion selling 478 million shares, leaving us with around $20 billion more to recoup on our remaining 26.5% stake in the company.

A very important extra:  the $14 billion gift that the government seems to have handed the company, in the form of a special tax break:

That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a company filing.

Companies typically get a break on future taxes because of past losses. But in most cases they lose that tax break during bankruptcy, because the losses are offset by the "income" the company receives from shedding its debt.

Since the company shed $30 billion in debt during bankruptcy, it should have wiped out most of the tax break. GM even warned it expected to lose those tax breaks shortly before filing for Chapter 11 protection.

But somehow, that never happened, and the automaker was able to keep most of its tax breaks, essentially receiving a $14 billion "gift" from the government.

While it's unclear why GM was allowed to carry over its losses, some experts insist that GM got preferential treatment.

What lesson, exactly, are we supposed to learn from this "success"?  What question did it answer? "Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?"  I don't think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM's 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable.  The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. GM has closed 13 plants and shed 25,000 union jobs in the United States. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks--and over $100,000 a piece if we just wanted to break even against our losses on the common stock.