the gm deal and paying for universal healthcare

The bailout to save a second troubled automaker, this time its GM, is all but finished. Although it is still likely that GM will file for bankruptcy protection on Monday, the details of the deal that were advanced by Geithner and the Treasury Department, are pretty much set, pending final approval by the UAW workers. The UAW and their retirees are the big winners in the deal. The union and the trust tasked with safeguarding the UAW retiree's pension benefits holds approximately $20 billion in claims against GM. In exchange for settling the claims, the UAW will receive $10 billion in cash money, a 17.5% stake in the restructured GM, an option to purchase another 2.5% down the line (but to be fair, it is not likely they will exercise that option because of unfavorable terms in the warrant, so let's just assume it will stay at 17.5%), $6.5 billion in dividend preferred stock paying an astronomical 9% dividend, AND about $2.5 billion in promissory notes. Wow, that is a mouthful. Contrast that deal with the one received by GM's secured creditors, which are owed approximately $27 billion. They will receive a 10% stake in the restructured company and warrants to purchase another 15% in about a decade. So the secured creditors are receiving less equity and no cash for more total claims than a group that is on-par with other unsecured creditors.

Now I understand that this is not a bankruptcy proceeding, but a voluntary agreement, but let's get this straight: it is voluntary in the same sense as the situation where one of the parties threatens to physically harm the other party in negotiations, inducing the party that is threatened to agree to terms. In this sense almost any action can be considered voluntary because the party is voluntarily acquiescing, albeit due to threats of violence. In the case of GM, the large majority of the secured creditors are the major banks, including Citi, Bank of America and the old Wells Fargo (not sure what they are now, Wacovia maybe?). The arbiter is the Treasury Department; the same treasury department that controls many of the decisions that the banks are allowed to make as a condition of their receiving TARP money last year. In other words, since the banks have not yet repayed the TARP money, the Treasury can make their lives very difficult if they do not like what the bank is doing. Therefore, the banks, fearful of retribution by Geithner by way of terms associated with TARP funds, are almost forced to accept less than they could achieve through bankruptcy. If this isn't strong arming I don't know what is. And the Obama administration is playing politics by playing softball with the UAW, giving them a larger ownership share AND CASH FOR HALF THEIR CLAIMS. This supposed to make up for further concessions by the union in their collective bargaining agreement, but a UAW press released claimed, "[f]or our active members these tentative changes mean no loss in your base hourly pay, no reduction in your healthcare and no reduction in pensions." (Link here to read the actual memo released just a few days ago.) So much for concessions that make GM profitable.

So if the UAW is getting 17.5% of the equity, bondholders another 10%, who is going to get the rest of the company? The answer is... you guessed it! The federal government! Does anyone really believe that GM is going to be profitable anytime in the immediate future? Just because they have received a ton of taxpayer money (all told the total amount is projected to be $100 billion) doesn't mean that they are magically going to start making cars people are going to want to buy. A partnership between the federal government and the UAW doesn't seem like the type of ownership that will focus on the cost cutting and efficiencies necessary to get GM out of the red and into the black, once again making it a profitable company. The UAW is going to continue business as usual, sacrificing profitability for more benefits for workers. But don't worry, the unlimited cash cow, the federal government, is their partner so I'm sure there will be plenty of money to go around, regardless of how much the company is losing. Nobody will complain when the tax payer foots the bill, will they? Mark my words, unfortunately the U.S. government is now a majority owner of the largest automanufacturer in the world and they are not going to relinquish that hold anytime soon. For the next few years, GM will bleed money and the federal government will finance the losses. The only bright side is that this may be an issue Republicans will be able to use against Obama and the democrats in 2010 and beyond.

Lastly, although there is more I want to say regarding Obama's recent proposals to finance universal healthcare, I just want to comment one of the ideas. For a breakdown of a few of Obama's proposals check out this Wall Street Journal article. Even Obama admits that the costs of such a program will be huge, and that the feds will have to increase revenue to pay for it. One of the proposals is to make it so that contributions to health savings accounts would no longer be tax deductible. Currently there is very little incentive for insured individuals to curtail their healthcare expenditures. Typically low deductibles and the co-pay amounts do not reflect the actual cost of the services rendered. Therefore the price payed by the consumer does not serve its critical function of relaying the information regarding the costs of the services to downstream users. Since the price is distorted, there is no incentive to only use the service when it is marginally beneficial. Therefore, the services are overused, imposing larger costs on the system as whole. Health savings accounts go a long way in fixing this problem. Typically, they will be employed in combination with traditional catastrophic insurance coverage with a high deductible. Instead of comprehensive coverage, the patient will contribute part of his paycheck into the health savings account for use for future medical services that are below the price of the high deductible. Typically the contributions are partially matched by the employer and are tax deductible, just like other contributions to health insurance.

Under such a system, the patient would have to pay the full amount of any treatments received up to the deductible amount. They will make these payments from their health savings account. Since the patient is allowed to keep contributions to the savings account that are not used, he has a strong incentive to save as much of it as possible. Therefore, in cases where he may or may not have to go to the doctor (like when he has a head cold), he will probably choose not to go if the price of the visit is more valuable to him than the benefits of the visit. There is no such incentive in a system where a doctor visit only costs a $15 co-pay. By allowing the price system to function effectively, costs on the system as a whole are reduced because only transactions that both sides consider necessary and beneficial will occur. However, by eliminating the tax deduction associated with health savings accounts, the Obama administration is attempting to provide fewer incentives for more people to adopt such a system. He would like to replace this capitalist solution with his socialist system where everyone buys insurance from the federal government.