General Motors Surrenders

Steven Rattner (left) and Ron Bloom (right) - Time Magazine

There is an element of politics whenever a chief executive departs, just as there must be in the timing of Rick Wagoner's departure from General Motors. In this case the White House has made quite clear its rationale in strict legal language. This week findings of the Presidential Task Force on the Auto Industry were posted on the White House website, including "Determination of Viability Summary: General Motors Corporation," which states:

The Loan and Security Agreement of December 31, 2008 between the General Motors Corporation and the United States Department of the Treasury ("LSA") laid out conditions that needed to be met by March 31, including the approval of Labor Modifications, VEBA [pension plan] Modifications and the commencement of a Bond Exchange.

As of the date of this memo, the above steps have not been completed, nor are they expected to be completed by March 31. As a result, General Motors has not satisfied the terms of its loan agreement.

The report, which takes exception with a number of key assumptions in the plan put forth by General Motors, goes on to state:

...even under the the Company's optimistic assumptions, the Company continues to experience negative cash flow (before financing but after legacy obligations) through the projection period, failing a fundamental test of viability.

In short, the Task Force put GM's best plan through a "stress test" and it failed.

Those who fear the Administration is being heavy-handed are reminded that it was General Motors that asked for the loan, then asked for another, then failed to produce a viable business plan. Today it became clear that the Administration would enforce market discipline by putting General Motors through the same kind of "financial workout" that other lenders routinely enforce when companies fail to meet their obligations to bondholders.

The Task Force is fully loaded with economists. Headed by Treasury Secretary Tim Geithner and Larry Summers, Director of the National Economic Council, the Task Force includes another seven members of the Cabinet and the Director of the White House Office of Energy and Climate Change, Carol Browner. The staff are directed by Steve Rattner, a corporate workout specialist, and Ron Bloom, whose experience includes advising the United Steelworkers union. Other Official Designees include economists Diana Farrell [no relation to the author], Gene Sperling, Austan Goolsbee, and Jared Bernstein, Chief Economist to Vice President Biden. Goolsbee's agency, headed by former Fed Chairman Paul Volcker, is specifically charged with (among other things) "reducing corporate welfare," according to remarks made today by Office of Management and Budget Director Orszag.

This new toughness on corporate bailouts occurs just as President Obama heads off to London for the G20 (Group of Twenty) Summit. There the Administration faces one more important sales job--that of convincing leaders of the other major world economies to fully and harmoniously participate in resetting the global financial system. A draft communique prepared for issue on April 2, pledges participants to supporting an "open world economy based on market principles, effective regulation, and strong global institutions."

One could fit nearly every version of capitalism within the confines of those broad, competing goals. For General Motors and its stockholders, lenders, suppliers, employees and pensioners, however, the options have decidedly narrowed.

See also Responses from Readers, a summary of reader comments when we asked in November whether the auto industry should be bailed out.

A collection of posts about the US Economy is maintained here.

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