PimpDaddy and Government Motors

The Government takes your money and gives it to others often in ways that are not apparent.  In fact, often economic news which has a positive “spin” put on it is, in truth, a product of the Government redistributing your tax money to those who do not earn it.

General Motors, aka Government Motors, reported June sales a few days ago.  The company reported a 16% gain over June 2011 sales.  The “quality” of the sales was described as “broad based.”  But let’s take a look “under the hood,” so to speak, at real quality of those sales.  Many of you have read the dealer inventory gimmick which zerohedge.com does a good job reporting.  But zerohedge misses a huge component of Government subsidy that I’ll get to in a moment.

As it turns out, a GM’s domestic sales were stimulated by a large increase in fleet purchases by the Government. There’s no telling if the Government really needed these cars – and it probably did not – but what a great way to boost the ability of Obama to use GM as a campaign tool.  In addition, as zerohedge chronicles, GM engages in an accounting gimmick known as “channel stuffing:”  LINK  To review the accounting, an auto manufacturer records sales when the car trailer loaded up for dealer deliveries leaves the factory parking lot.  GAAP accounting permits this.  The way it should really work is that a sale is not recorded until the end-user buys the car.  As you can see from the link, the inventory of vehicles at GM dealers has ballooned, increasing almost every month, ever since Obama used your tax money to bail out GM.

When GM assesses its sales in the middle of a given month, it can generate an increase in “sales” to dealers by slapping incentives and dealer “floor financing” to month-end sales for dealers and loading up the car trailers and sending them on their way. To be sure, some of those trailers are still on the highway going to dealers after the end of a month/quarter. You can see in that chart that dealer inventory has increased almost every month since GM was bailed out.  We don’t know what true end-user “organic” sales are, and therefore thanks to liberal, fraudulent accounting rules, we can’t tell for sure if GM is doing a good job managing the tax payers’ investment.  To the extent that GM stock is down 40% since GM went public, GM’s turnaround is failing.  Currently the tax payer investment in the stocks is $35 billion under water. There’s also $10’s of billions in direct bailout money that will never paid back. But you wouldn’t know it if you only listen to Obama’s accounting of GM.  He promotes the bailout as an example of his successful economic policies.

But there’s another insidious way in which the Government misallocates your tax money to prop up General Motors.  One which zerohedge misses.  Ever wonder why the monthly lease payment advertised on GM cars seems so low?  It’s because the Government, as part of GM’s bailout, guarantees the residual value of those car leases.  To review briefly, the residual value of a lease is the assigned value of a car at the end of the lease.  Lease payments are determined by the length of the lease, the amount of the down payment and the residual value.  The size of the lease payment can be reduced by increasing the amount of the assigned residual value.  But if a dealer sets it too high, it will lose money at the end of the lease.  Dealers don’t typically lose money on any part of a transaction.  Enter Obama.  The Obama Government put in a program when GM was bailed out to guarantee the residual of GM leases.  So dealers can set the residual value unrealistically high in order to create a low payment lease and the Government managers can look the other way on this because it’s taxpayer money, not their own money.  It’s a massive taxpayer subsidy of GM sales, because at the end of the lease term the dealer unloads the car at the prevailing used car market price and any loss vs. the residual value is reimbursed by Obama.  Neat trick huh?

This Obama-contrived monkey business is an egregious and substantial taxpayer subsidy of the large compensation packages received by both GM’s upper management AND GM’s unionized labor force.  Think about this way:  it is true that the GM bailout saved some jobs; BUT, the end result of this bailout is that Obama is taking money from your pocket and giving it to the upper management and workforce at General Motors.  The average GM union worker makes far more than the average non-union American worker, especially when the generous pension package is factored in.  This is an appalling and tragic transfer of wealth from bona fide workers in the economy to a business that would not have otherwise survived and should have been allowed to fail.  It also creates a significant amount “collateral” damage to the system that won’t be apparent for a few more years.  To the extent that there was a need for GM to exist, private capital should have been allowed to pick up the pieces and create real business with real sales and thereby create real “value-added” to our economic system.

Next time you hear Obama congratulate himself over GM’s “success,”  think about all the managers and employees who are living a good life thanks to your hard work and tax dollars.

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