By mid-December 2008, GM, the world’s second largestauto manufacturer, was losing $2 billion a month. RickWagoner, CEO since 2000, knew that GM did not haveenough money to survive much longer. The year 2008,GM’s 100th anniversary, was turning out to be its worseever. 1 Wagoner already knew GM would end the yearwith losses of about $31 billion. But that was an improvementfrom 2007 when the company lost $38.7 billion, thefourth-biggest corporate loss in history. Those losses, andlosses of $1 billion in 2006 and $10 billion in 2005, meantthat the company Wagoner led lost an astonishing $80 billionin four years.Wagoner was a dedicated, affable, and likable man.In high school, he had excelled in all sports but his heightof six feet four made him a star in basketball and upongraduation, he was secretly hoping to be a professionalbasketball player. But as a freshman basketball player atDuke University, it became clear to Wagoner that he didnot have the talent and drive to be a professional athlete.Instead, he majored in economics and also began datingKathleen Kaylor whom he eventually married. After graduatingfrom Duke University and getting an MBA fromHarvard University, Wagoner went to work for GM. Herapidly worked his way up through the company’s ranksand in 2000, he was named CEO, the youngest person toever hold that position in the company’s history.Wagoner blamed GM’s misfortune on a number offactors. One of the most significant factors, he felt, was the“Great Recession” of 2008 that had hurt the sales of allthe auto companies, particularly when the troubled banksstopped lending money so customers could no longerget car loans. Unfortunately, GM did not anticipate the“credit crunch,” and by 2006, it had sold off a controllinginterest in GMAC, the previously wholly-owned financecompany that had provided cheap loans to its car buyers.After GM sold 51 percent of GMAC to Cerberus for $7.4billion, Cerberus refused to let GMAC continue providingthe same easy credit to GM’s customers, which turned outto be a significant blow to GM’s sales.Yet another problem was GM’s labor costs. In 2008,GM was paying an average of about $70 per hour forlabor. That $70 included $30 that the worker actuallyreceived in wages, and $40 that went to fund other laborcosts including the worker’s benefits and pension, plusthe cost of providing health care and pensions to about432,000 GM retirees. Because GM had been operating for100 years, the number of its retirees was much larger thanthose of new car companies. Toyota, for example, was payingabout $53 per hour for labor in its U.S. manufacturingplants, of which $30 went to the worker as wages, and $23went to pay for the worker’s benefits and pension, but verylittle for retirees since the number was relatively low. Insome of its plants, a Toyota spokesman said, it was payingas little as $48 per hour for labor.But perhaps the major cause of GM’s difficulties wasits self-inflicted dependence on large SUVs (sport utilityvehicles). Japanese car makers could make small and midsizedcars for less than it cost GM to make comparablecars. To compete, GM had to lower its prices until theprofit margins on its small and mid-sized cars were vanishinglythin. But during the 1980s, when gas was cheap,GM discovered that large SUVs were big hits with malecustomers and with couples with growing families. Moreover,unlike its smaller car models, profit margins on itslarge SUVs were hefty, as much as $10,000 to $15,000per vehicle. As its SUV sales boomed during the 1990s,GM expanded its line and eagerly converted many of itsplants over to the production of the lucrative big vehicles.By 2003, the bulk of its profits were coming from SUVsales. But when the price of gasoline gradually crept upward,the costs of owning an SUV also increased causingthe SUV market to slow and then to decline. In 2004,unsold SUVs started piling up at car dealerships. WhenHurricane Katrina made gasoline prices soar in 2005,sales of SUVs eventually collapsed. Thus, GM ended2005 with a loss of $10.4 billion. Things improved somewhatin 2006, but then losses climbed to record levels:$38.7 billion in 2007, and $30.9 billion in 2008. Unfortunately,by now GM’s plants, strategic plans, research anddevelopment programs, and its mindset, were all lockedinto the production of SUVs, and it would take years tochange them.Because of its reliance on SUVs, GM had put off investingin the small fuel-efficient cars a gas-conscious publichad turned to in 2005. In the 1990s, GM had developedthe technology for an all-electric car, the EV1. The EV1Explore the Concept onmythinkinglab.comTHE BUSINESS SYSTEM: GOVERNMENT, MARKETS, AND INTERNATIONAL TRADE 191was, in fact, the first mass-produced modern electric carmade by a major car company. By 1999, GM had spent$500 million producing the EV1 and $400 million marketingit, yet had leased only 800 vehicles. Convinced thatthe car would never match the profitability of its SUVs,the company stopped making the cars and in 2002, it repossessedall the EV1s it had leased and phased out theproject. At the same time, both Toyota and Honda wereintroducing their small hybrid electric-gas engine cars intothe United States. The hybrids turned out to be a commercialsuccess and, more importantly, production of thecars allowed both Toyota and Honda to gain almost a decadeof experience in hybrid technology, while GM continuedfocusing on its gas-guzzling SUVs. In a June 2006interview published in Motor Trend, Rick Wagoner confessedthat his worst decision during his tenure at GM was“axing the EV1 electric-car program and not putting theright resources into hybrids.”All of these problems had culminated in the $80 billionloss that placed GM in the difficult situation Wagonerknew he had to deal with in the closing weeks of 2008.With many analysts predicting that GM would go bankrupt,banks—which themselves were barely surviving theworse financial crisis in decades—refused to loan the companymore money. At the rate it was running through itscash reserves, Wagoner knew the risk of bankruptcy wasgrowing daily. Given the company’s dire straits, he decidedthat only a government bailout could save it.Government bailouts were not popular. In September,2008, the George W. Bush administration asked theU.S. Congress to pass legislation creating a $700 billionfund called the Troubled Asset Relief Program (TARP).A reluctant U.S. Congress approved the TARP bill whichauthorized the U.S. Treasury Department to use the funds“to purchase . . . troubled assets from any financial institution.”The “troubled assets” were millions of mortgageloans that banks had extended to home buyers who werenow unable to make their monthly mortgage payments,and whose homes were worth less than their mortgagesbecause home prices had collapsed in early 2007. Sincethe homes were worth less than their mortgage loans, themortgages could not be repaid in full when delinquenthomeowners sold their homes or when banks confiscatedthem. Suffering huge losses, many U.S. banks were on theverge of failing as were European banks that earlier hadtaken over thousands of the now “troubled” U.S mortgages.Many economists predicted that these widespreadbank failures would turn the deepening recession into aglobal depression worse than the worldwide Great Depressionof the 1930s.In spite of the looming financial crisis, many hadopposed the plan to bail out the banks. A hundred leadingeconomists signed a letter to the U.S. Congress thatsaid lack of “fairness” was a “fatal pitfall” of the planbecause it was “a subsidy to investors at taxpayers’ expense.Investors who took risks to earn profits must alsobear the losses.” 2 Calling the bank bailouts “socialismfor the rich,” the Nobel prize-winning economist JosephStiglitz wrote “this new form of ersatz capitalism, inwhich losses are socialized and profits privatized, isdoomed to failure. Incentives are distorted [and] thereis no market discipline.” 3Nevertheless, if U.S. banks were able to get bailoutmoney from Washington, perhaps GM could do the same.So Rick Wagoner and two GM board members flew toWashington on October 13, 2008 to meet with officials ofPresident George W. Bush’s administration. During themeeting, Wagoner summarized the precarious position ofthe company and asked for a loan from the TARP fund.Bush’s people balked at the request, saying the legislationexplicitly said TARP funds were for financial institutionsso they could not be used to provide loans to car manufacturers.Turned down by the administration, a desperateWagoner turned to the U.S. Congress. On November18 and 19, he and the CEOs of Chrysler and Ford—thetwo other U.S. auto companies were also going throughdifficult times—came before Congressional committeesand asked for legislation authorizing government funds toaid the auto industry. Committee members, however, becameangry, particularly when the auto executives admittedthey had not prepared plans detailing how they woulduse the funds nor what changes they intended to make toensure they could return to profitability. In the end, thethree CEOs were told to come back in December withdetailed financial plans for their companies. In early December,the CEOs dutifully returned to the U.S. Congresswith plans in hand and repeated their requests for financialassistance. A few days later, both the U.S. House andthe Senate proposed legislation to aid the auto companies.Unfortunately, while the House approved the auto aid billon December 10, the Senate voted it down. Without thesupport of both the House and the Senate, the proposedlegislation was dead.Wagoner was stunned and despaired for the futureof the company he had served for over thirty years. Buthis despair turned to elation when he got a telephonecall from the Bush administration. The administrationhad decided the U.S. Treasury could, after all, usethe TARP funds to provide loans to GM as well as toChrysler. (Ford had decided it could survive without governmentmoney.) On December 19, 2008, President Bushannounced that the U.S. Treasury would provide GM witha $13.4 billion loan from the TARP fund, while Chryslerwould get a $4 billion loan. In announcing the assistanceto the auto companies, the Bush administration said “thedirect costs of American automakers failing and layingoff their workers . . . would result in a more than one percentreduction in real GDP growth and about 1.1 million192 THE MARKET AND BUSINESSworkers losing their jobs.” 4 To get the money, Wagonerhad to agree that by February 17, 2009, GM would handover a detailed plan specifying how it would achieve“financial viability” and the plan had to be acceptable toU.S. Treasury officials. With his back to the wall, Wagoneragreed to the terms and on December 31, 2008,GM got a first installment of $4 billion from its allottedloan amount; it received another $5.4 billion on January16, 2009, and a final installment of $4 billion on February17, 2009.Many objected that bailouts violated the free marketphilosophy embraced by many Americans and replaced itwith a kind of socialism. Republican Senator Bob Corkersaid the GM bailout “should send a chill through allAmericans who believe in free enterprise.” 5 Several Republicanmembers of Congress submitted a resolution onthe bailouts that said they were “moving our free-marketbased economy another dangerous step closer towardsocialism.” 6By February 17, 2009, newly-elected PresidentBarack Obama had taken office so his administrationwould end up finishing the auto bail-out that the previousadministration had set in motion. As part of the“viability plan,” that he had agreed to submit by February17, Wagoner was to renegotiate GM’s union contracts tomake its labor costs competitive with foreign car makers inthe U.S., reduce the number and models of cars it made,shrink its unsecured debt of $27.5 billion down to $9.2billion by getting creditors to cancel part of their debt inexchange for GM stock, and invest in fuel-efficient hybridand electric vehicles. 7Wagoner had quickly entered negotiations withthe United Auto Workers (UAW), GM’s major union,and with creditors. But GM’s creditors had stubbornlyrefused to reduce their debt by the amount the governmentwanted. In the end, GM did not reach the debt reductiontargets the U.S. Treasury wanted it to reach byFebruary 17. Nevertheless, in the final “plan for viability”it submitted to the U.S. Treasury on February 17,GM said it would cut 37,000 blue-collar jobs and 10,000white-collar jobs, close 14 plants over three years, eliminatefour of its eight car brands, cut manager salaries by10 per cent and all other salaries by 3 to 7 percent, andshift the costs of retiree health insurance to an independenttrust funded in part with GM stock and in part withdebt. However, the plan added, GM would need an additional$22.5 billion from the government to continueoperating to 2011. 8The Auto Task Force Obama had put together to reviewGM’s proposed plan was not happy with it. StevenRatner, who headed up the task force said:It was clear to us from the “viability plans” thatthe companies had submitted on Feb. 17 thatGM and Chrysler were in a state of denial. Bothcompanies needed gigantic reductions in theircosts and liabilities. They had way too manyplants and workers for expected car volumes.And their labor costs were out of line with thoseof their most direct competitors . . . I was shockedby the stunningly poor management that wefound, particularly at GM, where we encountered,among other things, perhaps the weakestfinance operation any of us had ever seen in amajor company. 9“Team Auto,” as the Obama task force called itself,spent over a month studying the plan and concludedthat GM’s optimistic assumptions that its market sharewould grow in the future, its costs would decline, and ina few years it would have positive cash flows, were outof touch with reality. On March 30, 2009, the Obamaadministration told the company that its plan was not acceptableand did “not warrant the substantial additionalinvestments . . . requested.” Nevertheless, GM was given60 days, until June 1, to try to extract deeper concessionsfrom its creditors and was also given another loanof $6.36 billion to carry it through the next two months.Although GM continued trying to work with its creditors,the Obama task force soon realized that the onlyway GM would force its creditors to forgive GM’s debtwas by filing for bankruptcy. 10 This would give a federaljudge the authority to cancel as much debt as was neededfor the company to become a viable business again. OnMarch 31, the U.S. Treasury informed the company’sboard of directors that if it filed for bankruptcy, the governmentwould provide the funding it would need toemerge as a viable company.By this time, Rick Wagoner’s fate had been sealed.In mid-March, Steven Ratner asked Wagoner about hisplans and he replied, “I’m not planning to stay until I’m65 but I think I’ve got at least a few years left in me . . . , butI told the [Bush] administration that if my leaving wouldbe helpful to saving General Motors, I’m prepared to doit.” 11 On Friday, March 27, Wagoner attended a meetingwith the Auto Task Force to discuss GM’s restructuringplans. Before the meeting Steven Ratner pulled him asideand said, “In our last meeting you very graciously offeredto step aside if it would be helpful. Unfortunately our conclusionis that it would be best if you did that.” Wagoneragreed to step down, and on March 30 he submitted hisresignation from GM.On June 1, 2009, GM entered bankruptcy. The U.S.Treasury created a new company named “General MotorsCompany,” and the now bankrupt “Old GM” soldits most profitable brands and most efficient manufacturingfacilities to the new “General Motors Company”who used $30 billion of the government’s money to buyTHE BUSINESS SYSTEM: GOVERNMENT, MARKETS, AND INTERNATIONAL TRADE 193them. The creditors of “Old GM” received a 10 percentshare of the new company plus proceeds from the sale ofthe assets of “Old GM.” A 17 percent share of the “NewGM” was put into a trust to pay for union retiree healthcare benefits; the union trust also received a $2.5 billionnote from “New GM” and $6.5 billion of its preferredstock. The government of Canada, which had contributed$10 billion to bail out several GM plants in Ottawa andOntario, got 12 percent of the new company. The remaining61 percent share of the company became the propertyof the U.S. government in return for a total of $50 billionit pumped into GM. The U.S. government also retainedthe right to elect 10 of the 12 members of the board ofdirectors of the “New GM”; it was now the major ownerof a car company. 12GM was not the only firm that became a (partially)state-owned company during the financial crisis. On February27, 2009, it was announced that in exchange for $25billion the U.S. Treasury was taking 36 percent ownershipof Citigroup, Inc., a large banking company driven to thebrink of failure by the financial crisis. On September 16,2008, American International Group, an insurance companyalso brought to its knees by the financial crisis, announcedthat the government, through its Federal ReserveBank, was taking ownership of 80 percent of the companyin exchange for $85 billion.Many observers claimed that government ownershipof companies is the kind of government ownershipof the “means of production” that Marx and other socialistsadvocate. For example, Robert Higgs, editor of TheIndependent Review , wrote that “the government is resortingto outright socialism by taking ownership positionsin rescued firms.” 13 And the Mackinac Center, a conservativeresearch institute focused on promoting “the freemarket,” published an article by Michael Winther thatstated:There are only two economic systems in theworld . . . These two economic systems are generallydescribed as “the free market” and “socialism.”. . . Socialism is characterized and definedby either of two qualities: Government ownershipor control of capital, or forced pooling andredistribution of wealth. . . . [T]he current bailoutcould be described as “super-socialism” becauseit involves every possible component ofsocialism: the forced redistribution of wealth,increased government control of capital, andeven the extreme of socialism, which is governmentownership of capital. Our federal governmentis not content to just regulate the markets(capital), but is also taking the next step of purchasingownership interest in previously privatecompanies. 14Questions1. How would Locke, Smith, and Marx evaluate the variousevents in this case?2. Explain the ideologies implied by the statements of:the letter to the U.S. Congress signed by 100 leadingeconomists, Joseph Stiglitz, Bob Corker, the Republicanresolution on the bailouts, Robert Higgs, andMichael Winther.3. In your view should the GM bailout have been done?Explain why or why not. Was the bailout ethical interms of utilitarianism, justice, rights, and caring?4. In your judgment, was it good or bad for the governmentto take ownership of 61 percent of GM? Explainwhy or why not in terms of the theories of Lock,Smith, and Marx.