Imagine you’re one of the bondholders of GM, the people who bought the automaker’s debt in order to invest in the company and keep it running over the last several years. Now that the company is near collapse, the Treasury offers you this deal. Even though you own $27 billion in GM bonds, you’d get 10% of the company. The UAW, which has a claim on $20 billion for its health-care and pensions obligations, would only have to sacrifice half of that to get 39%. The feds, who will invest another $9 billion to bring their total investment to the same level as your bonds, wants 51%.
Meanwhile, however, bondholders pose a major stumbling block to the restructuring. Under the proposed offering which GM filed with the Securities and Exchange Commission, investors holding $27.2 billion of GM bonds would swap those bonds for 10 percent of the equity shares of the restructured company. The United Auto Workers would get up to 39 percent of the company in return for half of the $20 billion GM owes to a health fund for retired workers. Current shareholders would get 1 percent of the new shares.
The Treasury said that to meet restructuring goals and to fulfill bond covenants, the restructuring proposal must win the support of 90 percent of the bondholders, an uphill battle because bondholders and analysts said the union had received more favorable terms even though its legal claim in bankruptcy court would be equal to the bondholders’. Investors who bought GM bonds in 2003 are particularly upset at being portrayed as obstacles because those bonds were used to provide funds for GM workers’ pension plan.
“We are deeply concerned with today’s decision by GM and the auto task force to offer only a small, inequitable percentage of stock to its bondholders in exchange for their bonds,” advisers to an ad hoc group of bondholders said in a statement last night. “We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another.”
Some advisers said that GM bondholders, if they are patient, might get more money from a bankruptcy proceeding than they are being offered under the new restructuring plan.
Does anyone at the Treasury do math any longer? The total sacrifice of all three parties would be $64 billion, of which the federal government and the bondholders are contributing the same percentage: 42.2%. The UAW will contribute about 15.6%. Why would the Obama administration expect bondholders to contribute 42% of the solution in order to gain 10% of the company? Granted, GM wasn’t exactly the best-run business, but only a bureaucrat would take that kind of offer — or be arrogant enough to make that kind of offer.
Small wonder the bondholders are balking at this proposal. They’d be better off in bankruptcy court, where their claims would get equal weight on a cost basis with the UAW and Treasury.
This is not just mere mathematical incompetence, however. Obama and his team want to engineer a political bankruptcy and dismantling of GM in order to pick their own winners and losers. Granting the UAW almost 40% of the company on a 15% investment makes no sense outside of Obama’s need to keep unions on his side while GM commits to much-needed downsizing and brand consolidation.
The Obama administration claims that the de facto nationalization of GM through their own claim on a majority stake in the company is an unhappy coincidence, but few are buying that explanation:
“Government ownership is an unfortunate outcome of this, not a goal,” said one person familiar with Obama administration deliberations and who spoke on condition of anonymity in order to preserve his relationships with officials. He said the government “could have gotten nothing for something, or something for something” and that it insisted on a 50 percent stake to leave open the potential to recover some of the $18 billion the Treasury Department has already lent GM and the additional $9 billion that it would inject under the new plan.
Some members of Congress and economists expressed concern that the government was effectively nationalizing GM and might exert influence over company decisions, despite its denials. Luigi Zingales, a finance professor of finance at the University of Chicago, said it would be “irresistible for the political system not to exercise some pressure. Do you not think they will push GM to make green cars? Maybe that’s the right thing to do and maybe not. But it shouldn’t be decided by Congress.”
The clear goal from the Obama administration is nationalization, in order to protect their relationships with unions, starting with the UAW. The green-car motivation plays a role as well. Obama talked often of the need to overhaul the American auto industry in order to produce energy-efficient cars on renewables. If he owns a majority stake in GM, Obama can make those decisions himself, along with the Democrats in Congress. The federal government never fails to exercise power it grants itself, and anyone who thinks that Obama would not take advantage of that majority position is either drinking the Democratic Kool-Aid or simply hasn’t paid attention.
If they didn’t want the majority position, why did they demand it in this offer to the bondholders, especially since they’re not investing any more than the private sector did? They didn’t demand that power just to leave it on the sidelines.
Addendum: I can’t resist pointing out the Department of Redundancy Department moment in the WaPo’s piece: “Luigi Zingales, a finance professor of finance at the University of Chicago …”