[classicman]

The Lessons of the GM Bankruptcy

Today is the first anniversary of one of this country's less-than-crowning milestones: the bankruptcy of General Motors, once the largest and richest company in the country, and indeed the world.

Keeping GM alive, albeit in shrunken form, was an expensive undertaking for America's taxpayers: about $65 billion in all, if one counts government aid to the company's former financial arm, formerly GMAC, now renamed Ally Bank. For all that money we, as a country, should take away some lessons from the experience. The following get my vote for the three most important:

• Problems denied and solutions delayed will result in a painful and costly day of reckoning.
• In corporate governance, the right people count more than the right structure.
• Appearances can be deceiving.

GM's current board—appointed by the company's controlling shareholder, the U.S. government—has a handful of holdovers from the prior board. Maybe they aren't bad people, but they surely showed judgment that was beyond bad. As the new GM prepares for an initial public offering of stock—so that the government can recoup the taxpayer investment—it will need credibility at the board level. The holdover directors should resign.

As for appearances versus facts, the GM bailout—along with the similar exercise at Chrysler—offers ample evidence. The understandable objection to bailouts is that they foster moral hazard, the willingness to act recklessly without fear of consequences. Yet the bailouts of these two companies had painful consequences aplenty for the major actors.

Shareholders of both companies got wiped out. Creditors took major hits, including those who held secured debt at Chrysler. (Their loans to the company were reckless, the equivalent of subprime mortgage loans, but they did recover more than they would have in a Chrysler liquidation.) Many workers and executives lost their jobs. Many dealers lost franchises. The Jobs Bank was abolished, albeit belatedly. So was no-cost health insurance.

All this seems plenty of pain to discourage future moral hazard. Letting the companies liquidate would have produced far more pain, of course, but much of it would have fallen on innocent bystanders—the ordinary citizens who participate in an economy that was on its knees last spring. The Obama administration, to its credit, tried to walk a fine line: doing enough for Detroit to protect the economy, but not doing so much to foster future irresponsible behavior.

Nobody on any point of America's political spectrum really liked this bailout. But having paid for it, let's hope that we as a nation are willing to learn from it.

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This guy takes some major shots at Ford as well.