Do Government Bailouts Really Work?

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On Monday, General Motors announced that it had earned its first quarterly profit since 2007. The automaker posted a $865 million net profit for the first quarter of 2010. They reported a positive cash flow of $1 billion and indicated that they expect to become a public company again as soon as the fourth quarter. GM also says it is on track to post an annual profit early next year. If these predictions are correct, it will be the first time the company has posted an annual profit since 2004.  

Guess this validates that government bailout check, right?  

Well, not so fast. Earning $865 million isn’t all that impressive when you consider the government lent the auto industry nearly $15 billion as part of its initial relief plan. More than that, General Motors and Chrysler’s ability to make money (Chrysler is forecasting an annual profit as well) comes more from being permitted to declare bankruptcy and less from the outpouring of funds. It’s a lot easier to turn a profit after you’ve wiped much of your debt away.  

Secondly, both U.S. automakers are announcing upward results at the same time that Japanese car companies are wiping egg off their faces. Recent recalls of more than 2.3 million Toyotas and more than 1 million Hondas have left these Japanese auto giants’ reputations tarnished (though Toyota and Honda reported impressive profits recently).

Details aside, however, the government and the companies it rescues have become adept at painting the bailouts in a favorable light. Consider, if you will, the recent announcement from the Treasury Department concerning American International Group Inc. (Stock Quote: AIG)Taxpayers can rest easy now knowing that the first bank to receive government aid is going to cost them $2.9 billion less than previously expected. AIG’s prospects have improved and it is expected to pay off part of the $182.3 billion it was loaned from the government so, in total, the bailout is estimated now to have cost only $45.2 billion. (That’s right, only.)   

Of course, the government wants the public to focus on the fact that AIG’s business has improved because that demonstrates that the bailouts were necessary and ultimately effective. However, not all companies that received government funding are trending upwards.

Just last week, government grubbers Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE)requested an additional $19 billion (pay attention again to the “b” in billion) in bailout bills due to hefty first-quarter losses. Fannie and Freddie’s relationship with the government may have already been innately incestuous, but the bottom line remains: you don’t need someone to give you money when you’re actually making it yourself. The two government-chartered mortgage finance companies have requested more than $145 billion in government aid since the U.S. Treasury had to take them over in 2008.

Fannie and Freddie’s escalating monetary needs highlight the real problem with bailouts as, truth be told, it may be too early to declare victory or defeat. What makes the bailouts inherently problematic is the precedent that gets set when the government starts giving taxpayer money away. At what point do we draw the line? This slippery slope, when you think about it, actually puts those of us on MainStreet in quite a conundrum. After all, won’t ultimately proving the bailouts were effective give the government license to spend more of our earnings?   

Want more insight to the battle happening between Wall Street and Main Street? Check out our series of articles.

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