Treasury announces GM exit strategy; automaker buying 200 million shares from U.S.

The Treasury has said it expects to lose $24.3 billion on the $85 billion auto bailout.

Treasury also holds a 74 percent stake in Ally Financial Inc., the Detroit-based auto lender, as part of a $17.2 billion bailout.

Last year, the government exited Chrysler Group LLC and booked a $1.3 billion loss on its $12.5 billion bailout.

That does not include the $45.4B in tax-loss carry-forwards that the company would have lost in a true bankruptcy as compared to government-manipulated one that waived the rules, or the non-union job and pension losses from structuring the deal to favor the UAW.

There is no way of knowing in advance which bailouts will succeed or fail. What is quite clear, however, is that taxpayer bailouts are for the worst performing companies. The profit from AIG simply justifies future bailouts of uncompetitive corporations with inefficient services and unwanted products, and those future bailouts of America’s worst companies will always be ‘sold’ to the public by the example of AIG.

I think you can make a case that suffering the moral hazard was worse than the alternatives on the grounds there was a need for urgent action. But had that not been true I would have let it go under. And even now, the question of what we do to make sure that companies don’t just assume they will get bailed out is a problem. Perhaps less of a problem than would might have happened if AIG had gone under at the point, but still a problem.

It means betting against the odds because you’re not the one who has to take the loss if the bet loses. It does not mean that no moral hazard was involved if you win the bet despite the odds. In the case of the bailout funding of AIG, it was not the government or the Treasury that would take the loss, but the taxpayers.

Yay (for taxpayers, not the government or Treasury) that this particular bet turned out on the plus side. That does not validate the claim that no moral hazard was involved or that said hazard is irrelevant. There was, and it doesn’t.

[FWIW I did not see Rob's comment until I went to unlock this comment of my own from moderation Limbo, and unlocked his while I was there.]

And as far as the “great recession” goes…it was the Federal Reserve, by creating and maintaining the housing bubble, that created the moral hazard for investors and companies like AIG by creating the allusion that housing prices never fall, even in a recession. Yes, CDS’s, as they were being sold at the time, were a bad idea. But there wouldn’t have been the market for them if not for the “malinvestments” that resulted from the housing bubble.

It’s simple-minded analyses like this that perpetuate the myth that government is, or has, the solution. The great recession was a direct result of government action, and the occasional “good” government action doesn’t outweigh the moral hazards hundreds of other government actions create…that’s my simple-minded analysis :-)