Twofish's Blog

February 21, 2009

General Motors as an SOE

Filed under: china, finance — twofish @ 11:50 am

It’s pretty clear that the US government is going to be heavily involved in General Motors and the banks, and it looks to me that the US government is making a lot of the classic mistakes in running state-owned enterprises.

A few thoughts as to what I think the US is doing wrong….

1) Not adjusting to the “new normal”.  As long is the US thinks of owning the banks and General Motors as a “temporary aberation” you are going to have problems.  Maybe the long term goal should be to sell off GM and the banks to private investors, but this can and will only happen after years of restructuring.  The problem with thinking of things as a short term fix is that it forces everyone to think in terms of quick fixes which don’t work and end up costing more in the long run.

2) The government must act as owner.  To me it seems incomprehensible that the Federal government is taking such large ownership stakes without having at least a seat on the board of directors.  You can argue that governments don’t know how to run car companies, and they don’t.  But neither do private investors, which is why people hire and fire managers.  As owner, the job of the private investor and the government should be the same which is to maximize returns.  The state has other interests, but these have to be exercised by other agencies.

The job of the Board directors is *not* to manage the company, that’s the job of the professional managers.  The job of the director is to represent the interests of shareholders and oversee the managers, and right now there is no effective mechanism that I see for doing that, and the fact that American companies often are very skewed toward managers at the expense of owners is part of what got us into this mess.

3) The government has to separate out commercial interests from regulatory and social interests.  There is a legitimate state interest in protecting employment, in preventing pollution, and in having companies may a profit, but these roles conflict and you simply cannot have the same person in charge of all of these roles.  It’s like a trial in which the judge, prosecutor, and public defender can all be state officials, but they have different roles to play.  Something that is going to hurt a lot is that you don’t have the “state as owner” functions separated from the “state as regulator” and this is going to cause huge problems.

4) Health care and pensions – The biggest problem that the Chinese SOE’s faced was that they were being forced to pay for health care and pensions.  This is a problem for GM since GM managers are being forced to be both auto manufacturers and health and pension supervisors.  What China did was to have the state assume the health and pension liabilities of the SOE’s.  Once the SOE’s no longer had to pay these, they could focus on growth, at which point they generated profits, which the state could take and then pay for it’s liabilities.

5) The role of local governments – One other thing that helped Chinese SOE’s was that the SOE’s were often owned by different and conflicting local governments which allowed functions to be separated.  One thing that the Federal government could do is to contract with state governments to manage their interests as owners.  This could be useful because different states have different interests that could be used to diversify the board.  If the state of Michigan has a seat on the board, they are going to care about unions and lost jobs.  The state of Mississipi just isn’t, and is going to do whatever it can to squeeze the unions and cut jobs in Michigan.  If you have both on the board, you end up with a diverse and probably more effective board of directors.

One other thing is that the Federal government has no effective institutions for exercising ownership powers over companies, because it’s something that the Federal government has never had to do.  State governments do.

6) The government as shareholder has to have interests aligned with other shareholders.  The part of the government that acts as shareholder has to have interests aligned with other private shareholders.  The Chinese government has set things up so that when the government makes a profit, it is shared on a equal basis with other shareholders.  The fear of a private shareholder is that the government can come in and take everything, and the government indeed can….. One time and only one time….

The trouble with the government investments in GM and the banks is that the government now has priority over other investors.  This is not a good thing because it means that no private shareholders are going to be willing to invest in GM or the banks, and  ultimately this makes things more expensive for the government.  If you have the government actually owning common stock, this forces the government as owner to try to make the company profitable, and this in turn means that the government as owner will fire the managers if that isn’t happening, and get new ones.

Right now the relationship between GM and the government seems to be very dysfunctional.  Basically GM is saying that if the government doesn’t put in money, that they will declare themselves bankrupt and make things very expensive for the government.  They are basically holding themselves hostage.  The problem with this is that at this point the government either hands GM a blank check and has GM blow up the economy.  The problem with this is that the government doesn’t have ownership interest.  If the government acted as owner, they  could write the check and fire the managers that forced them to write the checks.



  1. Nice analysis. I came here because of the astuteness – or at least articulate nature – of your comments on another blog. You didn’t disappoint.

    Comment by The Second Mouse — February 21, 2009 @ 3:17 pm

  2. Twofish, As our ancient phiolsophy teaches, someday we will all
    be dust. Meanwhile we need to do something useful for people.
    I request you to disable Brad Setser’s neoconservative
    recommendations for the Department of State on China policy.
    Setser has two important recommendations on China. One, he wants
    the State Department to intervene with China to stop China’s
    purchase of Treasuries. Next, he wants CIC and other SWFs to be
    dismantled, and hopes these sovereigns will go back to banking
    their surplus in dollar deposits.
    Thus, 600 million Chinese people in the interior will remain
    poor forever. China will never be able to come out of
    dependency on a US exports sector to be able to finance their
    domestic infrastrcuture expansion in their interior.
    Brad Setser’s career in the Council on Foreign Relations, and his
    bribe money from the banks in return for his every day essay,
    isn’t worth keeping 600 million people on the brink of starvation.

    Comment by Indian Investor — February 28, 2009 @ 9:57 am

  3. I’ve met true neoconservatives at various conferences. Brad Setser is not one of them. In fact, true neoconservatives consider the Council of Foreign Relations and people like Brad to be major enemies.

    I think you are wildly misrepresenting what Brad says, and you have too much certainty in your beliefs which is dangerous. Brad is not the enemy of the Chinese people. I am.

    It’s quite possible that I believe some policy and advocate some idea which turns out to be totally destructive to the Chinese economy. It’s happened may times before that I come up with what I think is a wonderful idea that turns out to be totally disastrous, and I make it a point to remember the dozens of ways that I could have destroyed the Chinese economy, and the hundreds of ways that I’ve been wrong about the way the world works.

    If someone thinks that SWF’s ought to be dismantled and that China should continue to increase their dollar deposits (and Brad thinks neither) will then may be they may be *right*.

    Looking at motives doesn’t help much. Anti-China neoconservatives, for example, have done more to enhance Chinese global political and economic power and influence than any other group in the United States. So just because someone is anti-China, and someone advocates policies with the explicit aim of destroying Chinese economic power, doesn’t actually mean that the policies that they advocate are bad for China. Conversely, third world aid programs implemented with noble aims have sometimes caused far more poverty they they have eliminated.

    Something that I find very humbling is to hear people talk about the 1949 Revolution in China. When Mao won is was truly a victory for idealistic, young people that were free from the prejudices and evils of the past. It was time to wipe the slate clean and create a “New China.” The people that won in 1949 were some of the most idealistic, noble, and self-sacrificing people in the world, and they really did want to help the peasants and the workers.

    So what the hell happened to cause the most destructive, cruel, and incompetent economic systems to get created. As a result of the 1949 Revolution, you had over 50 million preventable deaths, and had I been around in 1949, I would have been certainly responsible for some of that. The revolutonaries in 1949 had the excuse that they didn’t know what could happen, but I don’t have that excuse now.

    You just have to think about what is going on, and the moment you forget that the only real enemy is the face in the mirror, you are doomed.

    I really do think you owe Brad an apology, and stop sounding like DJC.

    In any event, I seriously doubt that he gets more “bribe money” from Wall Street than I do. It’s not the case that anyone pays me to say or not to say anything. But it is the case, that because I’m actively involved in finance that it does impact my views of the world.

    For example, I don’t think that there should be salary caps on people that work in finance. I think that incompetent bankers should be fired, but that competent bankers and bank do deserve very large salaries and bonuses, and there is more than a little obvious self-interest involved here. Also, I think that Wall Street plays a very important role in the world, and that it ought to be reformed rather than destroyed. Again, it’s not that anyone pays me money to say this, but rather that if I really felt that finance was evil, that I just couldn’t in good conscience work in finance.

    So if you want to read a good essay on how *all* bankers should be salary capped or how Wall Street should be destroyed, you just can’t read it on this blog, which is a good thing since if you base your view of the world only on what I say, you are an idiot.

    Comment by twofish — February 28, 2009 @ 11:23 am

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