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Trading Lessons

Government Subsidizes and Bankrupt Companies

Companies / Government Intervention Feb 27, 2013 - 11:15 AM GMT

By: BATR

Companies

There are many forms of government subsidies. Ambitious politicians ingeniously design schemes to expand their power and repay their donor patrons. Opportunist corporate enterprises beg for favor to fund projects or guaranteed loans. The role of government venture capitalism has produced a much-sordid record for the taxpayer. The sheer concept of picking winners and losers is a pure political play that defies pragmatic prudence. In spite of this, actuality, the rush to squander public money is one of the few growth industries. The pitiful results of the predictable bankruptcy are the common fate of this flawed business model.


The latest outrage has Buyers Circle Around Ailing Fisker Automotive. Yet, some critics of this assessment would have you believe that Fisker Automotive is in a sharp contrast to competitor Tesla Motors.

"But the fact that potential buyers are from China is already raising alarms about Fisker, which raised $1.2 billion in venture capital and spent about $192 million in federal loans to build a factory. "Technology developed with American taxpayer subsidies should not be sold off to China," Republican senator Charles Grassley told Bloomberg. He compared it to the acquisition of A123 Systems by China-based auto parts company Wanxiang Group.

By contrast, Tesla Motors, which also received a DOE loan to build its factory, is crossing into higher volume production. Yesterday, Tesla announced that it expects to be profitable this quarter and is making its Model S at a rate of 400 a month, which will allow it to hit its annual target and meet demand for the electric sedan. (See, Tesla's Explosive Revenue Suggests a Bright Future.)

One crucial difference between Tesla and Fisker, which is well known for its bold designs, has been Tesla's manufacturing expertise. Fisker may well still go public and be a successful EV supplier. But for energy-related startups to go the route of Tesla rather than Fisker, they'll need innovative technology, access to capital, supportive policies, and great business execution."

The Obama environmental cult would argue that it is largely appropriate to spend public resources to fund private technological businesses. Some will be successful while others will fail. However, the partnership role with government in this new state/capitalist prototype is necessary to achieve the greater good of a fossil free ecosystem. Expensive cars, not designed for the commuter, are now joint venture public finance missions, in order to curtail gas fumes.

Henry Ford is rolling in his grave and Enzo Ferrari is searching for the electric switch.

The notorious "Green" sector has vivid examples of bribery, theft, incompetence and high-priced inefficient technology. The Foundry publishes a most informative list of President Obama’s Taxpayer-Backed Green Energy Failures. "So far, 34 companies that were offered federal support from taxpayers are faltering — either having gone bankrupt or laying off workers or heading for bankruptcy." Examine the specific site links for expanded details.

Now expand the creativity of the subsidy culture to the bankruptcy constituency. The report, Union That Bankrupted Hostess to Receive Generous Government Subsidies, will push you over the edge.

"Last year, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union refused to accept concessions that would have kept Hostess in business. The company had tried to cut costs as it faced high labor expenses, rising ingredient costs, and decreasing sales. The Teamsters union accepted the concessions, but the Bakery union would not, choosing to strike. Unable to continue operating, Hostess filed for bankruptcy.

Now those who helped bring down an American icon will receive generous, taxpayer-funded benefits from the Trade Adjustment Assistance (TAA) program. These generous benefits come in addition to existing unemployment insurance, job placement, and job training programs. TAA benefits include:

• Up to two years of job training in an approved training program,

• Up to 52 weeks of Trade Readjustment Allowances for workers in job training,

• Job search and relocation allowances,

• A refundable "health care tax credit" that covers 65 percent of a worker’s health insurance premiums in qualifying health plans, and

• A two-year wage insurance program that partly replaces workers’ earnings if they accept lower-paying jobs."

The civic grant philosophy is not just for corporatists. Union goons prefer that their rank in file lose their livelihood, so that they can enjoy the welfare stipends of the state-run insolvent society. The prospects of a Mandarin logo on a Fisker vehicle are hardly on the same scale of transferring innovative technology to Cantonese creditors. However, the common practice of squandering national treasure for dubious purposes seems to be the primary product of the political careerists. Leave it to the progressives over at The American Prospect, for an unintended analogy, in the essay The Twinkie Defense - the unions made us do it. "Hostess Brands is classic case of private equity engineers and executives looting a viable company, loading it up with debt, and then asking the employees to make up the difference."

Regretfully, but with no remorse; the political class plays the role of private equity engineers, as the government plunders our economy, through crony spending and swelling of the debt, while saddling the taxpayer with the bill.

James Hall – February 27, 2013

Source : http://www.batr.org/negotium/022713.html

Discuss or comment about this essay on the BATR Forum

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors

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