The Government Gave Big Money To GM? Big Mistake

President Obama’s political operatives—if Vice President Joe Biden merits even that honorific—are going to the wall this campaign season on the government bailout of the automakers from a few years back. “Bin Laden is dead and General Motors is alive,” mouthed Biden ten days ago to a campaign throng. Obama himself wants Republican presidential candidate Mitt Romney to clarify his position from back when that a bailout of the automakers would come to nothing.

By the way, we now know that the bailout of 2008-09 was bigger than first thought (if that’s any surprise). The official expenditure by Treasury’s reckoning was $80 billion. But as theWall Street Journal recently reported, if you throw in the “tax-loss carry-forwards” that pit GM’s huge past losses against future profits, the IRS will be out another $18 billion in taxes never come due. Call it, in total, a cool $100 billion. Treasury still says it’ll get all of that back in due course save $24 billion. We’ll see.

For now, let’s cast back to the most hallowed of all research to come out of the discipline of finance in the go-go years, the 1980s and 1990s. This would be the big study of corporate re-investment compiled by Michael Jensen of Harvard Business School some twenty years ago.

Jensen did something interesting. He looked at the re-investment performance of essentially every firm the Fortune 500 (actually 432 of them) from 1980 to 1990. Then he ranked them, worst to first. Guess who came in dead last, as in the worst? Instinct already told you: GM. How about this stunner in second-to-last place: Ford.

In case you’re wondering, Philip Morris edged out Wal-Mart for the top spot. Now we know where all that tobacco settlement money came from. And lo, even today we hear noises of massive class-action lawsuits against Wal-Mart.

But the point of the article was GM. Here was a company, in Jensen’s finding, whose investment back in itself was so large that it was greater than the entire sum of venture capital committed nationally in those eleven years, 1980-1990. And these were no slouch years for venture capital, as Arthur Rock, Sequoia, and Kleiner Perkins might be prepared to tell you.

Or to put it another way (again Jensen’s example), GM could have flat purchased Toyota and Honda (the companies that were eating its lunch) for the amount of money it plowed back into itself in these years.

Here’s Jensen: “It is clear that GM’s R&D and investment program produced massive losses. The company spent a total of $67.2 billion in excess of depreciation in the period and produced a firm with total ending value in equity…of $26.2 billion.”

One purpose of the article was to stand agape at these numbers. Talk about cash burn! Never in the history of man (outside maybe the Labour government in Britain in the 1970s) had an engine been conceived, much less demonstrated and put out there, that could destroy money with such efficiency and consistency.

The larger purpose of Jensen’s research was philosophical. It was to point out that despite all the Joseph Schumpeter talk of “creative destruction” that is supposed to take place in modern economies, sometimes old firms don’t see the writing on the wall, don’t get the picture when a two-by-four is hitting them repeatedly over the bean. GET OUT OF THIS BUSINESS is specifically the message the market is screaming at them. And yet they keep plowing billions back into the business.

Jensen was actually humble enough to blame it on his own little coterie—finance professionals. He wrote: “I address the challenge this modern industrial revolution poses for finance professionals; the changes that we too must undergo to aid in the learning and adjustments that must occur over the next several decades.”

Let me be the first, at this late date, to let Michael Jensen and his people off the hook. All Jensen did in the service of getting his word out were things like wangle the Jesse Isidor Straus Chair of Business Administration from Harvard; found the Journal of Financial Economics; and steer Monitor consulting for a decade. If you as corporate bigwig didn’t hear what Jensen was saying from the 1990s on, you didn’t want to.

Which is to say: the GM bailout of 2008-09 flew in the face of perhaps the most iconic finding in finance since the economic renaissance of the 1980s. This was: do not invest back in your company unless there is a brilliant, external, objective reason to do so. Let outsiders (and this means private outsiders) invest in your company. Use your profits to pay dividends or to look for business elsewhere. Exhibit A of not following this advice was the domestic automakers.

Leave it to government to be the last to catch on, to double-down when doubling down is already passé. There’s one job that’s going to be preserved by the bailouts, though. That of financial historian. Can you imagine, in 2020 or 2030, what fun will be had, what cheers from the external reviewers will rise up, when some Michael Jensen protégé comes along with a table of mal-investment over the last twenty years, with all the lurid, mega-scale losses tallied up? The epigraph for the piece will have already been chiseled by Santayana eons before. Those who do not learn from the past are condemned to repeat it. Keep on keeping on, GM.

This article first appeared in Forbes.