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All Da King's Men

The New American Economic Model

By Da King Published: June 7, 2009

In the last nine months, we have learned a great deal about how "free market" economics in America really works. With all the bailouts of financial institutions (TARP), automobile companies (TARP), and federal/state/local governments (Stimulus package), it has become clear that our economic model is - profits are privatized (paid to investors), and losses are socialized (borne by taxpayers).

Not that this model applies to everyone. It doesn't. It only applies to the wealthy and powerful, those in the "too big to fail" category. For the non-powerful, the rules are the same as always. If mom and pop's bakery goes under, mom and pop still take the entire loss. The taxpayer's don't prop them up. Mom and pop assume the entire risk for the success or failure of their business. Only the big boys like Citigroup, AIG, GM, Chrysler, and Government get to operate in risk-free mode (nice work if you can get it). In fact, mom and pop not only have to bear the burden for their own business, they have to bear the burden for the big boys as well, because mom and pop are the taxpayers ameliorating risk for the wealthy and powerful. If GM loses, it comes out of mom and pop's pocket (thus giving new meaning to the old saying, 'As GM goes, so goes America.' That has never been more literally true than it is today). When GM (Government Motors) loses, mom and pop taxpayer have to pony up $62 billion and counting. If GM should turn around and start making money again someday, don't hold your breath waiting for mom and pop taxpayer to get paid back. Mark my words, that will NEVER happen. Chrysler's loan from taxpayers has already been forgiven (link). As part of GM's bankruptcy, $15.4 billion in loans from the taxpayer have been forgiven (link). President Obama has referred to GM's loan forgiveness as a "gift." In return for the "gift," the government gets to own a car company. Kewl. I'd say the taxpayers get to own a car company, but we all know that isn't true. The taxpayers don't really own squat. Remember the rule - profits are privatized, losses are socialized. If GM ever returns to profitability, Mr. and Mrs. American Taxpayer will never see a dime of it. There won't be any dividend checks coming their way.

In America, just like in the mob, you are either connected or you're not. Mr. and Mrs. American Taxpayers are NOT connected, therefore they don't get a cut of the loot. In America, Mr. and Mrs. Taxpayer are the marks. They don't get a cut, they only get the shakedown. In the case of GM, it's realy simple to figure out who's connected and who's not. Just look at the terms of the bankruptcy, which were handed down by diktat from the Don Fed-leone. Here's the new ownership of GM following bankruptcy:

Don Fed-leone (the federal government) gets a 60% ownership stake in GM.

The Canadian government gets a 12.5% ownership stake in GM.

The Union (the new UAW VEBA) gets a 17.5% ownership stake.

The bondholders (investors, retirees, hedge funds) get a 10% ownership stake.

Shareholders get virtually wiped out.

Of particular interest is the difference in terms between the bondholders and the union, both of whom are unsecured GM creditors. The bondholders got 10% for $28 billion in GM holdings, and the union got 17.5% for $20 billion in GM holdings. In addition, the union gets preferred stock. The bondholders do not. Preferred stockholders get paid first and are guaranteed dividends. The union got a MUCH better bankruptcy deal than the bondholders did. Why ?

Because the unions are more connected, that's why. They helped get President Obama elected, remember ? As Obama himself said, "I owe those unions." Don Fed-leone repays favors when it can.

Go here for a half-decent summary of GM's bankruptcy.

Btw, taxpayers. You get to back GM's warranties too.

We might have to rewrite the terms of bankruptcy law after this, because no such terms have ever been granted in bankruptcy before. This Presidential administration continues to move into uncharted waters of governmental authoritarianism. Uncharted for America, at least. Other countries operate like this all the time. Countries like Venezuela, Cuba, and China.

But not to worry, the government assures us that it doesn't really want to own or run automobile companies. The government assures us this is only temporary.

Like when the government took over Amtrak.

38 years ago.

Which the government still runs.

And which loses money every single year.

One guess who pays for those losses.

Why, you do, Mr. and Mrs. American Taxpayer.

You're the mark.

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