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).