GM plan really a UAW bailout

June 13, 2009


Under normal circumstances, it would be difficult to step in and confiscate billions of dollars in stockholder and bondholder wealth. These are not normal times, however. Industry turmoil gives the Obama administration the go-ahead to prepackage a bankruptcy petition that pads union coffers while wiping out common shareholders and ravaging public bondholders.

Under the administration’s plan, the U.S. government gets 60 percent of the new GM (presumably now called “Government Motors”), the Canadian government gets 12.5 percent, the United Automobile Workers’ health care fund gets 17.5 percent, and bondholders get the leftover 10 percent. As a sweetener, the UAW also gets a $2.5 billion note, and $6.5 billion in preferred stock paying a 9 percent cash dividend. In commenting on the plan, UAW leaders said that necessary changes involve “painful, unprecedented sacrifices” for union workers, the New York Times reported.

If UAW leaders want to contemplate really painful and unprecedented sacrifice, they should consider the plight of taxpayers, GM’s common stockholders and public bondholders. Common stockholders get nothing. Their investment in GM, worth as much as $12 billion during the past year, goes to zero. Bondholders who lent GM $27 billion are slated to receive only 10 percent ownership in the new GM.

While the $19.4 billion in Treasury financing received by GM is expected to grow to roughly $70 billion, it’s not clear why a projected $70 billion in Treasury financing buys 60 percent of the new GM whereas $27 billion in debt forgiveness by bondholders buys only 10 percent. Apparently, every dollar of Treasury financing is worth about two and one-half times each dollar provided by private bondholders.

If you want to see the value of union votes in the next election, consider that the Obama plan results in reducing UAW health care plan liabilities by $20 billion in exchange for $9 billion in cash and senior securities plus 17.5 percent ownership in the company. In other words, the UAW gets 17.5 percent of the new GM as compensation for reducing GM’s health care liabilities by $11 billion.

Debt forgiveness by the UAW is “super money” worth about twice as much as financing provided by the U.S. Treasury, and more than four times as much as money provided by private bondholders. Actually, it’s worse than that. Much of the Treasury-provided financing is targeted for direct payments to the UAW and not slated to buy more productive plant and equipment.

The New York Times reports that nearly all of GM’s hourly workers will soon receive lucrative buyout and early retirement offers. Production workers eligible to retire would receive $20,000 and a $25,000 discount voucher toward a new vehicle. Workers with at least 20 years of seniority who agree to give up future benefits would receive $115,000 plus a voucher. Union votes are pricey.

This Treasury-imposed restructuring is not a GM bailout; it is a UAW bailout with far-reaching ramifications. GM’s common stockholders are getting wiped out and public bondholders are getting hammered. Taxpayers and consumers get to pay billions of dollars for GM products that they never received or even wanted in the first place. All of this is to reward the UAW for bringing to its knees what was once an American icon.

In the process, the Obama administration is cutting a huge swath through contract law, overturning long-established bankruptcy procedures, and undermining basic free-market principles. Last year, Fannie Mae and Freddie Mac were nationalized in order to stabilize the credit markets. This year, GM’s common stockholders and bondholders, taxpayers and consumers are being bulldozed in order to protect the UAW.

Looking ahead, what firms and industries will be judged too vital to be left to the discipline of a free market? Which stockholders and bondholders will be sacrificed in the name of political expediency?

A long time ago, GM president Charles “Engine Charlie” Wilson was criticized when he told a 1953 Senate hearing that he believed “what was good for the country was good for General Motors.” In fact, what’s good for the country is good for employers, employees, consumers and taxpayers. What’s bad for the country is bad for everybody, and it’s bad to take resources away from successful companies that produce products that customers crave (like Toyota Camrys made by unionized workers in Kentucky) and give them to the unions of failing companies (like the UAW).

Mark Hirschey is the Anderson W. Chandler Professor of Business at Kansas University.


Godot 8 years, 7 months ago

This is a great analysis. Top notch.

"Looking ahead, what firms and industries will be judged too vital to be left to the discipline of a free market? Which stockholders and bondholders will be sacrificed in the name of political expediency?"

The term "too big to fail" was Hank Paulson's/Tim Geithner's/Ben Bernanke's excuse for plundering the taxpayers to enrich Goldman Sachs, JP Morgan, and others. For Obama, the issue is not whether an industry is too big to fail, it is whether Obama personally approves of the way the business is being run, or believes he can do it betther, and/or whether he can reward a group of supporters or donors by confiscating the business from its current owners and placing his cronies in charge.

You can get a hint as to which entities are next in Obama's sights by listening to him as he criticizes them for being poorly run, or says that the business practices are "unacceptable," or "irresponsible." When he names the industry and the uses the word "emergency" or "crisis" in the same phrase, you will know for sure, that sector of private business, or even local government, is the next target.

Health insurance companies are soon to either be nationalized, or driven out of business by unfair competition, by the US government. Small banks are on track to be forced to merge with the big banks because of restrictions and high fees placed upon them by Obama's FDIC Chairman Blair. It is ineviable that the energy industry, in particular the oil companies, will be nationalized before Obama is through. My guess is that there will be a few failing media outlets that have to be "rescued" by nationalizing them, as well.

Did you know that there is a bill in committee that proposes repealing the term limits for the office of the president? If it gets railroaded through like everything else Obama desires, Obama will have plenty of time to finish his confiscation of the US economy. Make no mistake, in the lawless reality of Obamanomics, it is Obama who will pick and choose the winners and the losers.

Godot 8 years, 7 months ago

Obama mentioned the drug companies and the need for them to share in the sacrifice in order tor Obama to save $313 Billion in health care costs.

Look out, Big Pharma, you have a target on your back.

ASBESTOS 8 years, 7 months ago

Bronze you are Waaaayyyyy out there. The Business Professor is more knowledgeable and more informed that you are. Quoting Bill Moyers as fact as opposed to an academic specialist in the field of economics is weak and lame.

His point is spot on:

the dollars that were invested by the private sector are only worth 10% value, but the medical and other benefit money is worth 2.5 times the current dollar value.

Not too hard to figure out this was a political move for the Unions.

The tough job now is to make a company that actually makes money. A union and the Federal Government running it will most likely result in the failure all the taxpayer funding was supposed to stop.

No this was a UAW bailout.

And America will turn it's back on GM like the plague.

If the economy truns down another time this summer or late fall, GM is toast, and the "strength of the Union Vote" is not going to mean much.

What do you think is going to happen to Chrysler after FIAT gets ahold of it? The Union is gone there. GM will be the only full Union shop in the United states.

BTW, you cannot be productive with all that time off. Adds to the expense of the cars, that is what the benefit package UAW/GM bailout is about: 96,000 workers paying for 1,000,000 beneficiaries. Destined for failure.

Read a little more before you post. Economics does not run the way BIll Moyers thinks, nor his lefty guests.

Godot 8 years, 7 months ago

Unions bought the election for Obama. They expected to receive Chrysler and GM in return, and they got it. Case closed.

Godot 8 years, 7 months ago

Jimmy Hoffa's legacy lives - in the Obama regime.

Tom McCune 8 years, 7 months ago

The UAW is crazy if they want to own GM stock. They would be better off to invest their money in the stocks of biotech or other companies with a future.

The previous GM management may have been bad but, seriously now, what chance to you think the company really has with a board of directors elected by the US Treasury and the UAW? Their incentives are all wrong. They want to make jobs, not profits. Which means they are doomed.

This has been doomed from the very beginning. We should have let GM go into Chapter 11 before wasting billions in public money on it.

notajayhawk 8 years, 7 months ago

Guardian (Anonymous) says…

"One Big A$$ Mistake America"

America already knows the GM bailout was a mistake.


and it looks like they're waking up to the bigger mistake you're alluding to.

Marion (Marion Lynn) says…

"There will be lots of money to be made in GM stock for even the small investor."

Dependent on two assumptions:

1) That investors would be willing to take the chance, given how the current investors got - well, got something, and without K*Y.

2) That the company doesn't go under being run by a federal bureaucracy. Oh, and this guy:


"If the Obama administration was looking for radical change at the top of General Motors, it probably won’t get it with Fritz Henderson"

"In 1989, he joined GMAC as director of mortgage banking for New Jersey. A year later, he was made vice president of mortgage banking."

(Now there's a big confidence booster.)

Katara 8 years, 7 months ago

I find it amusing that so many act as if union workers are not taxpayers.

With Whitacre on board now, I think GM may have a possibility of turning itself around. While I would not call him "union friendly", he had a very good working relationship with the Communication Workers of America and AT&T is one of the few companies that has done very well in this economy and traditionally has been a solid and stable company.

Katara 8 years, 7 months ago

Whitacre is a shrewd business man. It is obvious that the majority of those on the board of the directors at GM also knew next to nothing about cars. Otherwise, wouldn't you think that GM would not be in the position that it is in now?

Brent Garner 8 years, 7 months ago

I predict years of direct or indirect federal subsidies for Government Motors. Dear Leader can't let it fail!

lctchr1 8 years, 7 months ago

niles says. . . "Hirschey is right of course. At the least, Obama's administration has underminded a foundation of capitalism by rewarding the UAW a higher return on GM's assets than the secured bond-holders. I believe I heard the UAW's medical trust received 44 cents on the dollar, whereas the secured bondholders received only 28 cents. This is a grossly perverse and dangerous move so recently after credit markets nearly seized."

Yep. Oh, and take no pity on the shareholders. When you buy a share of stock in any company, you take the risk of that stock being worthless if bankruptcy occurs. Healthcare is different. It is morally wrong that we don't cover our citizens and that big health insurers screw people the way they do. Totally different than the GM situation. Our political system is broken. Neither party is right. We need term limits, and we need politicians who will make tough decisions. Our country is broke.

Ryan Neuhofel 8 years, 7 months ago


Bravo! Spot on. Unfortunately, the popular culture views 'politics' as a sporting event with only 2 teams to "root for". Almost everything is viewed through the phony spectrum of "left and right" - far-left = "socialism/communism", far-right = "theocracy/fascism" and "moderates" somewhere in between. How can you moderate between two totalitarian forms of government?

Ironically, the "socialists" and "religious right" whom attack each other daily will ultimately lead us to the same place. Social freedom and fiscal freedom are inherently linked and control of one inevitably leads to control of the other (by whomever is in power).

A socialized health care system is inherently political in nature - which is great if "your guy" is in power. I have a thought experiment for all my "pro-single payer" friends: Say we get your dream government controlled system (and don't tell me single-payer isn't government controlled) and then a very "socially conservative" administration + Congress takes power in Washington. What policies do you think they would (and now could) implement on health care to achieve a "moral goal"? I'll let you daydream.

In fact we can already see this "merging of ideologies" taking place in health care - with so-called liberals wanting to regulate/penalize what we "eat, drink and smoke" because it's a burden on the financial system (now only 50% public).

ASBESTOS 8 years, 7 months ago

"What we have now is the worst of both collectivist movements. The educated , pragmatic right embraces laissez-faire capitalism yet is encumbered with the malignancy of the collective religious zealots intent on the repression of personal freedoms. Whereas the progressive, intellectual left has brought mankind farther towards personal freedom than has ever been achieved, yet is shackled with ignorant, misguided socialist parasites who would eliminate economic freedoms through taxation as a means of subsidy to the needy - who are in fact mostly just plain lazy and/or inept."

Thank you for posting this. Thank You.

notajayhawk 8 years, 7 months ago

lctchr1 (Anonymous) says…

"Yep. Oh, and take no pity on the shareholders. When you buy a share of stock in any company, you take the risk of that stock being worthless if bankruptcy occurs. Healthcare is different. It is morally wrong that we don't cover our citizens and that big health insurers screw people the way they do."

1) You might BE one of those shareholders, if you have any kind of retirement plan - or, for that matter, have any money on the bank.

2) The taxpayers aren't being asked to pay for the healthcare of "our citizens," only "our citizens" who retired from GM.

neuhofel (Anonymous) says…

"Say we get your dream government controlled system (and don't tell me single-payer isn't government controlled) and then a very “socially conservative” administration + Congress takes power in Washington. What policies do you think they would (and now could) implement on health care to achieve a “moral goal”?"

You mean like Missouri's experience with Medicaid under the former governor, for instance?

monkeyhawk 8 years, 7 months ago

Hirschey better look out if he is teaching this stuff to those kids up on the hill. His contract might not get renewed.

Mark is one of the most intellectual LTE writers, and I am always firmly in support of his opinions. Thanks to him for trying to enlighten the masses. Too bad most of his words will fall on deaf ears in this little town.

My 20 year old niece asked me a question the other day, "Do you like Obama?" I wondered why she would ask me that and she said that she doesn't want to look back in a few years and regret voting for him.

I'm afraid I gave her a crash course on socialism, government dependency and the constitution. She appeared to be a little bummed out, as any 20 year old with a good brain would be, because it seemed futile to her to go through years of college and strive to be successful, only to have the government take the fruits of her labor in order to "spread it around".

She is beginning to understand that "change" ain't necessarily always a good thing.

Ryan Neuhofel 8 years, 7 months ago


I have not kept up with Missouri's Medicaid experience . . .I try to pretend Missouri doesn't exist at all! (I kid, I kid). I'd love to hear your thoughts on the matter - you work in MO right?

People rarely contemplate the long-term implications of granting federal politicians centralized power over an entire industry. The same potential hazards exist in nationalizing education, banking, etc. Unfortunately, Thomas Jefferson was right when he said, "The natural progress of things is for liberty to yield and government to gain ground."

camper 8 years, 7 months ago

Oh boy. How much I agree with this article. I agree with the federal government stepping in (under extraordinary circumstances), but I don't agree with centralizing power.

I think the government should be using bailout money to save companies (and shareholders) from going into bankruptcy.

Call me a conservative Keynesian if you will.

Godot 8 years, 7 months ago

Niles, I am paraphrasing a greather thinker than I when I say that there are not two parties, or two ideologies, there are only two personality types: those who want to control others, and those who do not.

Obamamaniacs are the ones who believe their destiny is to control others.

notajayhawk 8 years, 7 months ago

neuhofel (Anonymous) says…

"I have not kept up with Missouri's Medicaid experience …I try to pretend Missouri doesn't exist at all! (I kid, I kid). I'd love to hear your thoughts on the matter - you work in MO right?"

Yes, but the situation I was referring to was as a taxpayer and resident - that was before we moved over here. And I can't speak as to how it affected any of my patients at the time - I was working in a state-operated hospital so we couldn't bill Medicaid.

Basically, though, former governor Blunt cut the budget for Medicaid by making what some people thought were drastic changes in eligibility, as well as instituting co-pays for a lot of people on a lot of services. Of course the people on one side of the issue screamed the usual stuff about wanting poor minority children and bedridden elderly folks to die, but the fact is there were a lot of people eligible for Medicaid who really didn't need it and could afford the minimal co-pays (my own patients that are on Medicaid typically pay a 50-cent co-pay for meds). I was making much (very much) less at the time (I worked for the state, after all, and wasn't licensed yet), but I still made right about the median income for our family size and had access to very good coverage that was very affordable (I worked for the state, after all), and I could have had my own daughter on Medicaid, full coverage with no co-pay.

The point is, as you alluded to, when you turn it all over to the government, you never know when that government is going to change and drastically cut coverage, institute co-pays, etc. And the end of the business that I'm in (mental health) is heavily supported by tax dollars. As a result, I know first-hand how many hoops and barrels you have to jump through to collect from the state. And how many claims they deny for ridiculous reasons. And how when the end of the budget year comes around, they simply stop paying when you exceed the amount the legislature allocated for the year. (When I worked for the state, we actually closed units, laid off staff, and turned people away when the fiscal year was winding down.)

Godot (Anonymous) says…

"Obamamaniacs are the ones who believe their destiny is to control others."

I prefer the term 'Barakolytes.'

Commenting has been disabled for this item.