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June 1, 2009
GM Numbers: New Plan Does Not Make Economic Sense
GM has $90 B in assets and $170 B in debts. The government plans to put in another $30 B, for loans. the new company will be a shell of its former self, employing 40 to 50 thousand or so workers once all the plants are closed. GM has 225,000 workers worldwide and, until today, 90,000 here. Why spent so much on a shell of a company with a very questionable future? Given even optimistic estimates for selling new cars, GM is likely not to show a profit for many, many years. It is likely to go into bankruptcy again, soon. This is a major government investment for 40 to 50 thousand jobs (less than half the seats in Ohio State Stadium).
Morevoer, under the new plan, much of the overhanding debt is cancelled in exchange for equity in the new company. Yet the amount of equity doled out to the various debt holders is very suspicious. The standard is equality -- all unsecured debtholders with cancelled debt get an equal amounts of equity relative to the debt cancelled. This equality standard has been, as many commentators have noted, trashed. Workers unsecured claims get four times the value of the unsecured claims of all other creditors. Taxpayers as current debtors get less, ceding much of the value ot their equity claims to the UAW. In essence, taxpayer and bondholder money has been shuffled into the UAW.
The new structure establishes severe conflicts of interest. To whom does the CEO report? The government? Canada? The UAW? The government has a conflict -- it is both regulator and owner. As a regulator it reports to environmental constituencies, labor unions, and others. Taxpayers lose in this. The UAW, on the other hand, supports American -only jobs (members pay dues). The union does not care for GM cars imported from abroad (where some of its best small cars are manufactured); it will willingly ssacrifice GM profit for job guarantees. In sum, this is a political payoff from a new Democratic government to one of its longest and most faithful supporters, the UAW. The government is saving jobs that should not be saved to save a union. The government will be protectionist (selling Opel on the condition that Opel not import into the United States, for example) and will subsidize the jobs to subsidize the union.
A Chapter 11 reorganization, many months ago, without government interference and money, was the best route, but government interference cost GM the opportunity for a normal restructuring. The past iinvolvement of the government, sacrificing the opportunity for a Chapter 11, now means the best decision going forward is a Chapter 7, liquidation. Sell the $90 B in assets and divide the cash among the debtors.
The history of government bailouts of auto companies worldwide is abysmal. Why can we do better? This goverment controlled Chapter 11 is either a very, very reckless path born of hubris or a calculated political payoff with long-term economic costs. You pick.
June 1, 2009 | Permalink
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Comments
It's Ohio Stadium...otherwise good article
Posted by: Anonymous Student | Jun 2, 2009 4:32:36 PM
Economic sense? Has anything this president done made economic sense?
Posted by: Doug | Jun 3, 2009 12:37:59 AM
The assets of General Motors would be worth far less than $90 billion if liquidated. Nobody is buying toxic waste contaminated factories in the Rust Belt or automobile manufacturing heavy equipment right now. Nor is anyone hiring experienced automobile industry workers.
Chapter 11 is producing lots of results that a good for GM that would have been harder outside bankruptcy. It is shedding legacy costs (mostly in the form of bond payments and retiree health insurance costs), thinning its dealership ranks without paying the penalties associated with doing so out of bankruptcy, and securing a better deal with its unions. It has also found the resolve in GM to shut down several unprofitable divisions, and may even be able to sell some currently unprofitable divisions like Hummer and Saab for something. By selling Opel, it is giving up a profit center, but also making the business as a whole more governable.
There is no conflict of interest for the CEO. The CEO reports to the Board of Directors, just as the Prime Minister in parliamentary governments reports to parliament. Like many parliaments of the world, this one is a coalition Board rather than a homogeneous one. But, the presence of a U.S. government shareholder with majority control eliminates the risk of deadlock. Board meetings may produce conflict, but they won't leave authority issues for the CEO or produce deadlocks.
Also, it is worth recalling that the union has a seat at the table because it was a major creditor who is still compromising a claim and is also offering additional new value concessions for current workers in exchange for a better deal in the ownership structure. Bondholders, in contrast, aren't offering new value.
Government owned enterprises can function passably well. The U.S. Postal Service and Tennessee Valley Authority are the good examples of this, although Amtrak is a negative one. Many municipalities have 100% government owned utilities and enterprises. My beloved Denver handles its own trash and recycling collection, runs the Denver Water Board upon whom life as we know it in arid West depends, and owns the Winter Park ski resort. A good share of non-U.S. big business is government owned -- including a large share of the world oil industry and a good share of the banking institutions in the developing world. Most of roles served by checking and savings accounts in the U.S. commercial banking system are served by the government owned postal account system in Japan. Sweden famously dealt with a similar financial crisis by nationalizing all the banks.
There certainly is room for government ownership of GM to lead to regulatory favoritism, and the Opel deal does have a potentially protectionist angle (as does the Fiat deal requirement that some Fiat vehicles be made locally). But, there is no other possible debtor-in-possession creditor for GM or Chrysler, so the choice is between losing the going concern value of these two companies, or government financing, and every lender demands some price, in the case of the government, a politically motivated one.
The U.S. Government is rightly uncomfortable with taking a long term stake in GM. But, better than it control its pivotal investment, than be beholden to third party management for its success. Honestly, compared to the financial sector bailouts, this deal looks pretty good on a jobs saved per money put in basis.
Posted by: ohwilleke | Jun 3, 2009 1:29:33 PM
Excellent points. One other conflict (probably too obvious to point out): the UAW is now both an owner of GM and the collective bargaining representative of the employees. I know of no precedent for this...probably because it is so absurd.
Posted by: MByrne | Jun 3, 2009 8:39:12 PM
Examples include United Airlines and every unionized German industrial company.
Posted by: ohwilleke | Jun 9, 2009 1:23:02 AM
I agree hundred percent with your position! I have not seen one executive from General Motors fired for total mismanagement of the company's resources. Yet thousands of American workers will lose their jobs, their benefits and America will lose the tax revenue from those individuals. Has GM sold all their limousines, corporate jets, and posh penthouse apartments for the executives yet?
The answer as always is... NO! It seems our current president was in bed with General Motors and the United Automobile Workers of America. This is the biggest betrayal of the American public in modern day history. Just my opinion... but in the end we will all pay for it.
Posted by: Zumba | Jun 9, 2009 1:54:41 AM
Our government keeps throwing money (ours) at situations to "save jobs" but in the end (GM, Chrysler, atc.) the jobs still disappear, leaving the US with more unemployment, more government (to watch over our wasted money) and poorly run businesses. Will we ever learn?
Posted by: Ron Stone | Jun 11, 2009 2:57:55 PM
