GM to Close Volt Plant for Four Weeks, and Why Another Bailout Is Likely


General Motors announced yesterday that they were going to idle the Michigan plant that makes the Chevrolet Volt from mid-September to mid-October to "match supply with demand." What? There isn't enough demand for a $39,000 car that provides all-electric, gas-free driving for 40-mile stretches?! It is shocking but true. This is the second time this year the plant stopped making Volts.

In addition, the Treasury Department has reported that the government expects to lose more than $25 billion on the $85 billion auto bailout. This is 15% higher than previously estimated, and may still underestimate the losses. Until the government is able to sell its 500 million shares of GM stock, the total loss is unknown. Sales are postponed until after the November election. (How convenient!)

Taxpayers should never have been required to bail out GM in the first place. Instead of going through bankruptcy, where the company would have been required to fix its long-run problems (poor management, inefficient work rules and high labor costs), the bailout allowed the underlying problems to be perpetuated, and simply delayed the inevitable consequences. The United Auto Workers (UAW) had raised Detroit's labor costs to 80% above other automakers, and these high wages were a significant factor in the decline of the company; however, not a single member of the UAW was required to take a cut in pay, a mistake admitted by Obama's "car czar," Stephen Rattner.

Rarely does a company shut down completely due to bankruptcy, but most often it is required to restructure its debt. Funds are paid proportionally according to secured and unsecured creditors. Bond investment decisions are largely based on the priority of repayment in the event of bankruptcy. Lower returns are paid to those investors closer to the "head of the line." Obama completely ignored this hierarchy of secured creditors and the result has been (besides the loss to those GM and Chrysler investors) an reluctance of bondholders to re-invest in the auto industry. (Fool me once, shame on you. Fool me twice, shame on me.)

The Obama administration paid some creditors only a fraction of what they were owed (while labeling them "greedy speculators") while giving the UAW trust fund assets tens of billions -- including partial ownership. Some of those "greedy speculators" were schoolteachers, farmers, white-collar, non-union former GM employees, investing for their retirement. I remember watching Obama announce that his administration was intervening in the negotiations and thinking it was not legal, nor fair. (Actually, I remembering yelling at the TV, "He can't do that! He can't do that!") New research from labor economist James Sherk estimates Obama redistributed $26.5 billion more to the UAW than it would have received through traditional bankruptcy proceedings.

Forbes magazine is predicting that GM is headed for bankruptcy again. The company is again losing market share, which would have happened even sooner without the Japanese earthquake and Thai floods, and seems unable to develop products that are competitive in the U.S. market. After years of pressure from environmentalists, GM came out with a green car hybrid to earn a piece of the growing market for "green energy" cars. However, GM has overestimated the demand for these cars, especially at the current price. Chief Executive Officer Dan Akerson's projections were to sell 60,000 Volts globally, of which 45,000 would be delivered in the U.S. In June, sales estimates had been revised to between 35,000 and 40,000. (When management is making production decisions on what you should buy, rather than what you want to buy, it is the epitome of basing production on ideology rather than consumer desires.)

And GM's problems aren't limited to the Chevy Volt. There are also problems with the Malibu and the European Opel. To try to offset these problems, GM has resorted to relying more heavily on risky subprime auto loans, as noted in Investor's Business Daily. And as we have witnessed in the meltdown of the subprime market in real estate, selling products to people who can't afford to pay for them is not a great long-term strategy.

Obama has staked too much of his first-term success on the bailout of the auto industry. There is no doubt that he would "double-down" on his first decision and bail them out a second time if necessary. As our national debt races towards $16 trillion, could we honestly afford another $25 billion loss?