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GM’s IPO: not a return to former glory

General Motors went public again last week, raising $23 billion in its initial public offering (IPO) - the country's largest ever. The US government's ownership stake was halved as a result.

The successful offering appeared to vindicate the Obama administration's decision to bail out the struggling automaker in early 2009. For many of those who support free markets and believe the state can have no role in assisting profit-making enterprise, the GM turnaround has been hard to accept.

But the ability of the state to financially engineer a leaner GM should not come as not a total surprise. For a start, the US is not a pure free market economy: government intervenes in multiple ways, including regulation, subsidies and ownership. Moreover, as the GM case shows, the state has a unique capacity to help in restructuring. The Obama administration's auto task force forced deep cuts in GM's North American operations: GM sold or closed four of its eight brands, shut factories, eliminated hundreds of dealerships, and fired thousands of workers. At the same time, as the Wall Street Journal notes, "the administration forced GM bondholders and the United Auto Workers into agreements that cut GM's debt substantially. The company emerged from bankruptcy in July 2009 with a clean balance sheet and soon began generating cash... Just before the IPO, GM used some of its cash to reduce its debt further and trim its pension liabilities." 

Indeed, it is not as if GM in a matter of a year or so learned how to build quality models that would sell. Many improvements in certain areas had already been made in the eight years GM was led by CEO Rick Wagoner, who was fired in at the time of the bailout. But lots of its products were duds, and it was in dire financial straits. What was critical to reviving GM was to wipe out of the dead-weight of the past - its huge debt, its unproductive lines and high overhead costs.

The real question is, why couldn't GM restructure itself, without government help, before the crash? Why did it take a financial crash, and unusual government intervention, to get it done? Indeed, GM is not the only one - there are many companies that were bloated. A big part of the answer is credit: GM (and others) could continue to borrow, and did not have to face the music. A financial crash is the form that restructuring recessions take in thoroughly financialized economies, like the US economy.

Amid all the IPO celebrations, it is worth pointing out that GM is not in the clear. The company will still need to see significant growth if the US is to re-coup its investment. In one way or another, the US government will be helping GM into the future. For example, as a Journal editorial  highlighted, the government has allowed GM to carry forward previous tax losses, and buyers of the Chevrolet Volt will receive a tax credit. GM will bear the imprint of "Government Motors" for some time to come. And even if the government does turn a profit, the new GM it will have created will be leaner and meaner - but nothing like the dominant company it once was.

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