This wasn't just months in the making. It took years for GM to get to this point. I think I've mentioned this before, but there's an old saying, I don't know if it was a marketing slogan or what... "as GM goes, so does America"... Well, if that holds true, it must mean that default on America's debt can't be too far behind too. In fact, given the circumstances, GM's fate may be America's as well after all.

What really started the bloodletting at GM and the other big 3 automakers was the collapse of Lehman Brothers back in September. They issued no-limit commercial credit to big companies which ran a bit low on funds. This effectively amounted to a "super credit card" issued to company's like GM which allowed them to grab all the cash it needed, no strings attached, to meet short term obligations. The issuance of unlimited credit hid the fact that they were incurring debts that they simply couldn't pay. But as long as the credit pipeline flowed, there was no problem. The name for this super credit card? Commercial Paper--short term IOU's or promissory notes that banks and investment houses printed up and sold to investors and companies to pay for short term expenses.

As it turned out, commercial paper didn't just act as a temporary stop gap for cashless corporations. It became a permanent fixture for almost all major corporations whether they needed the cash or not, and they tapped it for nearly 50 years! GM was one of the worst offenders in this category. It allowed corporations to operate year after year, decade after decade with minimum cash and maximum debt, as least until Wall Street collapsed. When Lehman Brothers declared bankruptcy, the commercial paper market dried up. Banks, money market funds and other investors refused to buy that commercial paper. The market almost effectively died and companies like GM that relied on financing its operations through short term debt were thrown into the brink of bankruptcy.

The government tried to jump back and revive the market by making all kinds of guarantees, and they did stem the bleeding to an extent. But that doesn't change the fact that most of Corporate America is drowning in debt, nor does it change the fact that the Federal Reserve's and the government's solution to the problem is incurring MORE DEBT to solve the problem!

Even more incredible is the fact that $20 billion worth of taxpayer dollars could not save GM. President Obama did accomplish one thing with GM's bankruptcy: a huge transfer of wealth from GM's lenders (mainly the big Wall Street banks), bondholders, and the taxpayers who financed the bailouts into the hands of UAW and the other big unions which supported Obama in the election. It also puts one of the country's largest companies in the hands of the US government.

The US government will have 60% equity stake in GM, with Canada holding 12%. Almost 3/4th of the company will be government owned. I have extreme reservations with this "government conservatorship", although I believe GM should have filed for bankruptcy some time ago. That represents a huge risk to taxpayers who will be subsidizing the cost of reorganizing GM, not to mention it represents a huge conflict of interest when the government crafts policy on fuel efficiency standards and labor law. It is very well possible that the government might pass legislation that gives GM an unfair advantage over Ford and other automakers. Hence the perils of government ownership.

This only highlights the broader moral hazard of using taxpayer funds to bail out failed corporations. The billions that the government gave to GM to pay off their short term debts over the past 6 months were largely a waste, since they could have just as easily filed for bankruptcy back in November or December, thus saving the taxpayers those billions. Bankruptcy filings after all are not uncommon among large international corporations and allow the company to get their financial affairs in order and emerge stronger and more competitive.

Most troubling is the government's lack of an announced plan to hold its equity for a short period of time and then sell their shares to the highest bidder. It sounds as if the government is stuck owning these shares well into the foreseeable future. There may also be an effect of suppressing competition within the auto industry with the US government holding a majority stake in GM.

The government's direct ownership of a major US corporation is really unprecedented and a highly troubling development that can only weaken the principles of free markets.