Corporate Welfare

All You Zombies

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John Berlau on the ejection of GM chief Rick Wagoner:

zombie

The ouster of General Motors CEO Rick Wagoner by the Obama administration isn't the first time in recent history that the government has forced out a CEO. That first happened in September when Bush administration Treasury Secretary Henry Paulson forced out American International Group CEO Robert Willumstad in favor of Paulson's friend Edward Liddy.

The lesson from AIG is that replacing a CEO is no panacea. There is no love lost for the poor management of Rick Wagoner. He is the one who went to the government, hat in hand -- and when the government is paying the piper, it can call the tune. But replacing him won't solve GM's long-term problems of too many brands and too large a workforce. And it is increasingly clear that the bailout itself is an impediment to effective restructuring.

The prospect of an ever-increasing supply of tax dollars is leading parties with auto industry contracts -- unions, bondholders, dealers and others -- to play a game of chicken. No one wants to renegotiate a contract when they think the government will come in with more money to cover the losses….

To say that consumers would be discouraged from buying a car from a company in bankruptcy misses the point. Consumers would be more likely to buy a car from a company restructured by a bankruptcy court, as they buy tickets from once-bankrupt airlines, than [to buy] vehicles from zombie companies dependent on the next government bailout. This delay likely hurts "satellite" companies like auto parts makers more than a bankruptcy would.