Welcome to Government Motors
By Daniel M. Ryan
As bankruptcies go, General Motors' will not go very well for its equity holders. Two earlier reorganization deals, both widely variant in the stake offered to GM bondholders, had this percentage in common: current shareowners were allotted 1%. The later split eliminated even that sliver. Governmental share of the company: 72.5%. The union retiree trust fund: 17.5%, plus a warrant to acquire more. Bondholders: same old 10%, although sweetened with a warrant to acquire up to 25% total. 100 – 72.5 – 17.5 – 10 =, well, the lowest result within the confines of limited liability.
These percentages referred to a "new" GM, stripped of its funded and government-held debts, which would hold the crown-jewel divisions. The, er, bag that's left over will hold any payment for the jewels plus unprofitable divisions that GM's been trying to sell. That's the bag that GM equity holders will be holding.
Hope for anything better will be realistic only if a substantial number of GM bondholders – enough to gum up a de facto prepackaged bankruptcy – are also substantial equity holders. The best chance for a better crumb for the equity would be the secured or senior unsecured creditors also being big shareholders. Someone with high-ranked debt and a chunk of equity will have two reasons to favor a foot-drag: first of all, the share of valuta redounding to that debt may exceed the pro-rata apportionment of new equity under the above-mentioned quickie plan; secondly, the current equity might then have some residual value squeezed out of it too. Although the chances are (forgive me) about 1 to 0% for the stock to get anything substantial, as GM's net worth is close to Sacramento-level negative, the equity may be thrown a crumb as a side payoff. Formally, the common shareholder has no clout in bankruptcy court. As a matter of practical fact, though, there are some ploys that equity holders can pull. Especially if some of those shareholders are also creditors.
Whatever the outcome, GM will inevitably become Government Motors. Some seamy details are beginning to emerge from the Chrysler bankruptcy which indicate how Government Motors will be run. The Law of Unintended Consequences, which happily inserts itself even into Chicago-style politicking, has also materialized.
With the above item as a warning of sorts, there is a case that can be made for the U.S. government running the GM show - as a majority owner. No, not the Marxist case; not the socialist one, either. The argument I'm referring to can be called the "get 'em off their high horse" case.
If the U.S. government is to run General Motors, it will be for the express purpose of getting U.S. taxpayer money back. At the very least, should this purpose fade into ostensibility, talk radio would never lack for talking points. Consequently, there will have to be some effort to make Government Motors into something approximating a profit-seeking entity.
In doing so, the Obama Administration may discover a lesson long ago learned by a man who President Obama could be compared to: George McGovern. In 1972, he was a not-quite-standard left-liberal. On his way to left-lib Utopia, though, he took a detour through Vermont…to own and keep an inn. In doing so, he finally faced the brunt end of the regulatory state. Needless to say, he was a little surprised at what he and his left-lib colleagues had been exhorting and voting for. After this chastening experience, his stance would never be the same.
That's the road the current administration is heading down – one where GM policy will mean facing the brunt end of many 'for our own good' laws. Rather than pronounce on high, the administration is going to grapple with balancing engineering and financial realities with a lotta regulations and legislation. For the first time in car industry history, the law-executor and the regulation-originator will have to follow both. There'll be no more political third-party-payer effect for car-related rules anymore. The U.S. government, as soon-to-be majority owner, will finally face the bracing challenge of making a greenie- and SuperCAFE-compliant profit.
It won't be too long before the current crew clues into the fact that what's good for General Motors will indeed be good for America...unless new money stuffed into now-empty rat-holes and multi-billion-tax-dollar write-offs are deemed to be "good for America."
Any libertarian worth his/her tome can diligently pick apart this argument. Liberal governmenteers getting their hands dirty in a tightly regulated industry do fertilize seeds for more government expansion. There'll be obvious rationales for the U.S. government to push laws making U.S. consumers buy from Government Motors; policy changes may not be confined to a quietly-enacted Executive Order suspending certain exigent decrees. The Democrats who idolized Japan in the 1980s are still around. So are the ones who believe Japan's car industries compete with a sewn-up domestic market thanks to non-tariff barriers. Both will be dutifully angling for the ears of the car czar, not to mention the President's.
That being noted, there still may be a side benefit: auto-related cloud minding will be much more inconvenient. Welcome, O U.S. Government, to Management.
Get weekly updates about new issues of ESR!