Thursday, April 30, 2009

Turning GM over to the UAW and the government

The deal that is coming out of the government aid and deadline for GM is truly astounding. As the WSJ breaks down the numbers, private bondholders of GM securities would get 5 cents on the dollar for their investment and own 10% of the company; the government will own 50% of the company and a return of 87 cents on the dollar; and the UAW would own 40% of the company and have a return of 76 cents on the dollar. Now we know why Obama and the UAW have been fighting so hard to keep GM out of the bankruptcy court.
In a genuine Chapter 11 bankruptcy, these three groups of creditors would all be similarly situated -- because all three are, for the most part, unsecured creditors of GM. And yet according to the formula presented Monday, those with the largest claim -- the bondholders -- get the smallest piece of the restructured company by a huge margin.
The goal seems to be to drive private investors away from the company and leave the UAW in control. What will the government's next action be if GM doesn't recover and people don't buy GM cars in the numbers that they need? Will the government pass laws to favor the car company that we and the unions hold such a large stake in? Will mandates go out to all government agencies that they can only buy GM cars?
Some Treasury officials have told the media that 50% government ownership is important to ensure that taxpayers get repaid for the $16.2 billion in Treasury loans. But this is false logic. Taxpayer-shareholders are likely to be far better off with a smaller stake in a truly private company that is better insulated from political meddling. Private owners are more likely than the Treasury or the unions to try to run the company for profit, and so increase its equity value over time. Treasury says it would be a hands-off owner, but that hardly seems plausible and in any case that would merely leave the UAW in control. At the next labor contract bargaining session, the union would sit on both sides of the table.
This means that the company will never prosper or fully recover. And the impact of this nationalization of GM will spill over to other companies.
Certainly the bondholders deserve to take a haircut like everybody else. But squeezing them in such a blatant fashion has other consequences. Who would be crazy enough to lend GM money in the future? The Treasury also says it wants banks that do poorly in its "stress tests" to try to raise private capital before putting in more public money. The mauling of GM creditors tells investors not to invest in TARP banks because everything this Treasury touches turns to politics.
The Obama administration's approach to GM has sent a chilling message to any investor who might be thinking about putting money into these recovering sectors of our economy. If you invest in a company that fails, forget about getting back a fair percent of your investment through a bankruptcy procedure; the government will simply decide which of the investors they want to favor and if there are any unions in the mix, fuggedaboutit!