GMAC, as most of you likely know, was General Motors' financial group. GMAC had originated as a means for the auto company to support the market for autos through its wholly owned lending group. But as with most corporate enterprises, it outgrew its origin, reaching near-collapse after becoming heavily involved in the residential mortgage securitization business and subprime loans. It was transferred to a hedge fund in 2006, and ultimately required rescue by the government's bailout program in the 2008 financial crisis. Why was GMAC bailed out when other mortgage lenders were not? The government wanted to save the auto lending business, so "auto czar" Steven Rattner says, the rescue of GMAC was necessary in that "the governmant had to act quickly and there wasn't enough time to untangle GMAC's mortgage unit from the auto lending business." U.S. Taxpayers Earn Profit on Ally, as Treasury Cuts Stake, Wall St. J., Oct. 21, 2014 at C4.
GM, of course, ultimately established a new financial arm related to its auto business, and that company has acquired some of the GMAC's successor's businesses around the globe. See, e.g., GM Financial to Benefit from Wall Street Upgrade, Sept 24, 2014.
GMAC --renamed Ally Financial in its new incarnation--was bailed out by the federal government, with remedies including government-approved board members, sales of business lines, bankruptcy of its subprime mortgage business, and more than $17 billion in government capital through TARP. Six years down the road, Treasury is selling off shares of Ally: it announced last week that it had sold $245.5 million since mid-September and had now reduced federal ownership from almost 74% to barely over 11%. The government made about "$18.3 billion from selling Ally shares--a return of $1.1 billion, or about 6.4%, on its $17.2 billion investment." U.S. Taxpayers Earn Profit on Ally, as Treasury Cuts Stake, Wall St. J., Oct. 21, 2014 at C4.
This story is important for several reasons.
- First, it reminds us of how closely Treasury's functions as tax law implementer/tax collector correlate with its other functions related to the US economy, such as the financial crisis actions to prevent the unwieldy demise of financial institutions. Today's Treasury Department is a major economic actor in the federal government, from its role in administering tax laws that use tax subsidies (tax expenditures) as a substitute for direct legislation on matters across the spectrum of government activities to its critical functions in implementing health care reforms through the Affordable Care Act and dealing with international trade and with market failures and successes.
- Second, it provides evidence supporting the progressive view that government is an important actor intervening in times of market failures. The government interventions in response to the 2008 financial crisis were not perfect--in part, because they failed to hold the primary actors like CEOs and other managers of financial institutions accountable by including civil and criminal penalties and, at a minimum, clawbacks of excessive executive pay and so-called performance-related bonuses and in part, because lobbying by the very culprits of the crisis persuaded a too-close-to-industry Congress to avoid forcing those financial institutions to reduce mortgage principal amounts to aid ordinary Americans with underwater mortgages. Nevertheless, those interventions were important to maintain a viable economy and prevent the country from slipping even more deeply into recession.
- Third, it demonstrates that such interventions (and other government efforts to correct market failures, such as regulatory regimes) do not, as right-wingers so often suggest, inherently prove worse than letting "the market" self correct. Interventions may appear costly to taxpayers, but they can provide necessary Keynesian stimulus and they can even be profitable--returning the taxpayer investment- and more- to the Treasury.
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