Category: Government ownership

Behind the GM Euphoria

Wall Street is always looking for a reason to be euphoric, and it found one this week in the return to the market of General Motors.

Less than two years after filing for bankruptcy and being taken over by the federal government in a $50 billion bailout, the automaker became the darling of investors and commanded a surprisingly high initial price of $33 a share.

Many of those investors had apparently not read the voluminous S-1 Registration Statement that GM filed with the Securities and Exchange Commission. If they had, they would have found a document that in its current iteration requires more than 13,000 words to summarize the risk factors facing the company.

Companies are required to be especially candid in warning investors what they may be facing when buying into a company whose shares are being offered for the first time (after its transformation GM is technically a new firm). But this prospectus is amazing. Here are some reasons why.

  • Acknowledging that its current chief executive and chief financial officer are from other fields, the S-1 says the company’s prospects depend on their ability to “quickly learn the automotive industry.”
  • The document reveals : “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.”
  • The company admits that it has an image problem: “The automotive industry, particularly in the U.S., is very competitive, and our competitors have been very successful in persuading customers that previously purchased our products to purchase their vehicles instead as is reflected by our loss of market share over the past three years. We believe that this is due, in part, to a negative public perception of our products in relation to those of some of our competitors.”

Inexperienced management, poor financial controls and a negative public perception don’t seem to constitute a foolproof recipe for success. But there’s much more to the recitation of risk factors, including the fact that even after the stock offering the U.S. government will remain by far the company’s largest shareholder.

GM reminds potential investors that its bailout came with some strings attached. For one thing, the company is supposed to take steps to maintain its U.S. workforce at or near existing levels. If GM is a shining example of a renaissance of American manufacturing, as some observers would have us believe, it shouldn’t be a problem to maintain jobs in the USA, especially in light of the concessions that members of the United Auto Workers union consented to in order for the bailout to proceed.

But GM’s management hints that it might be interested in even cheaper labor abroad. The S-1’s summary of the company’s current business strategy includes the following:

Enhance manufacturing flexibility. We primarily produce vehicles in locations where we sell them and we have significant manufacturing capacity in medium- and low-cost countries. We intend to maximize capacity utilization across our production footprint to meet demand without requiring significant additional capital investment.

That sounds like a plan to expand foreign rather than domestic production. Elsewhere the company seems to be complaining when it notes that the federal government “may have a greater interest in promoting U.S. economic growth and jobs than other stockholders of the Company.”

GM’s management also bemoans the fact that “restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives.”

In other words, the new GM is beginning to sound a lot like the old GM: blaming unionized workers for problems caused by management failures and market conditions. And like its predecessor, the new GM seems to be itching to dump more of those workers in favor of cheap labor abroad. This may be the main reason it is so eager to bring the federal role to an end.

If cost cutting on the backs of workers — rather than real innovation and competent management — is to be the focus of the new GM, it will probably end up in the same mess as its predecessor.

The investor excitement about the new GM may be good news for the federal government, but it could turn out to be just another market bubble.

Final irony: one of the big beneficiaries of the GM initial offering is Goldman Sachs, which in July agreed to pay the feds $550 million to settle charges of having deceived investors. Goldman is making about $9 million as one of GM’s underwriters.

Nationalization Would Be Good for Our Health

Nationalization—a term alien to most Americans taught to believe in the ideology of a free market—is now at the center of a public discussion on how to address the ongoing crisis of the country’s major financial institutions. For most observers, nationalization is viewed as an unfortunate and temporary step that would be taken to restore troubled banks to health and then turn them loose on the market again.

Yet perhaps we shouldn’t be thinking in such narrow terms. If the taboo against government ownership is disappearing, now might be the time to consider applying that solution to another industry that causes Americans a great deal of grief: for-profit health insurance.

Long before the banking system became a national embarrassment, health insurance companies—especially health maintenance organizations—were a leading symbol of market forces running amok. A wave of consolidation put the industry under the control of a handful of huge for-profit corporations whose business plans are based on the denial of as much care as possible. Despite being hit with a variety of class action lawsuits filed on behalf of patients and healthcare providers, their practices remain largely unchanged.

Calls for healthcare reform have grown, yet mainstream analysts insist that private insurers have to remain a central part of any new system. Although it is the norm in most other developed countries, the conventional wisdom is that government-managed coverage—the single-payer approach long advocated by groups such as Physicians for a National Health Program—is unthinkable here.

That’s not because single-payer isn’t feasible. On the contrary, it’s the for-profit system that leaves a lot to be desired in the efficiency department. Consider this: According to their latest financial statements, the five largest private U.S. health insurers—UnitedHealth, WellPoint, Aetna, Humana and Cigna—together spent more than $36 billion on marketing, administration and other non-medical costs last year. This represented 19 percent of their total costs, which doesn’t include the administrative costs they impose on doctors, hospitals and other healthcare providers. By contrast, in Canada’s government-run single-payer insurance system, administration accounts for only 3.4 percent of total costs.

If the five big U.S. private insurers were that efficient, they would be spending only about $7 billion a year on non-medical costs. In other words, they are wasting nearly $30 billion a year on functions that do little to promote the physical well being of their subscribers. In fact, a large portion of the waste represents their efforts to reduce care and thereby raise profits, which for the five totaled more than $8 billion last year despite a difficult economic environment.

A great deal of the waste among private insurers reflects the huge workforce—totaling more than 200,000 at the top five firms—they employ to operate their immense bureaucratic machine. Imagine how much better our system would be if most of those 200,000 people were retrained to be healthcare providers rather than deniers, and the billions in wasteful spending went toward lowering premiums and improving care.  Some researchers have estimated that the replacement of the multiplicity of private and public payers into a single national system would eliminate $350 billion a year in wasteful expenditures.

In his speech to Congress this week, President Obama was emphatic about moving on healthcare reform soon, but he was vague about details.  Vast sums are being spent to at least partially nationalize banks. Why not use some of those funds to take over the health insurers that create their own form of financial distress?

It is an auspicious time to take the plunge. Thanks to the slumping stock market, the stock prices of the big insurers are cheap. The total market capitalization of the big five is currently only about $74 billion. For far less than what has been spent giving dubious capital infusions to banks, the federal government could buy out all the shareholders of the large insurers and move their subscribers into a federally operated system—perhaps an extension of Medicare—that could use cost savings to remove restrictions on coverage and enroll the uninsured.

I know there are a lot of complications, but this may be a rare opportunity to cast away old assumptions about what is possible and seek radical rather than patchwork reform. Nationalization of shaky banks may prove to be a futile effort; the federal takeover of private medical insurance would pave the way to a more humane and effective healthcare system.