GM enters bankruptcy, creditors howl

The US will end up with a majority stake in General Motors after it exits bankruptcy, if a judge sides with the Obama administration and the taxpayers pony up another $30 billion in subsidies.  The Obama administration says that no further bailouts will be required, but the investment will result in the federal government owning 60% of the restructured GM for its total of $50 billion in cash infusions since last fall.  Creditors want to derail the plan, not because of the government stake, but because of the UAW’s eventual stake in the company:

Under the proposed restructuring, about 60 percent of the new GM would be owned by the United States, about 12 percent by the governments of Canada and Ontario, a union health trust would own 17.5 percent, and the company’s current bondholders would get 10 percent.

But as the administration builds the case for another massive infusion of government money into the automaker, it is also dealing separately with accusations that its plan unfairly favors the United Auto Workers at the expense of the company’s investors.

The fairness issue will be central as the GM bankruptcy case goes before a judge this week: Does the government-sponsored restructuring plan equitably accommodate all of the company’s stakeholders?

The essential issue isn’t fairness, it’s legal and financial equity.  We saw this during the Chrysler bankruptcy as well, when senior creditors got intimidated into accepting far less per dollar than Fiat and the UAW received from the proceeds.  The Obama administration did an end run around long-established laws governing the priority of liquidation of assets in bankruptcies, in order to give a big political payoff to the union.

The White House did the same thing with GM.  Creditors hold $27 billion in notes, for which they will get 10% of the company, or $2.7 billion for every percent of ownership they receive.  The government owns 60% for its investment of $50 billion, a rate of $834 million per percent of ownership.  The UAW has a $20 billion stake in the company, but the settlement would replace that with 17.5% of GM along with $9 billion in notes and preferred stock, according to the Washington Post.  That puts their investment at $11 billion (what they surrender in this process), making their cost per percent of ownership $629 million — by far the lowest of the three major stockholders.

Obama is penalizing the people who invested in GM by devaluing their stake based on whim, not legal or financial rules.  They want to skew the result to favor the union and themselves.  It’s another political bankruptcy, rather than a legal dissolution of a private firm according to well-established contract law.

Hugh Hewitt suggests a long-term solution to such blatantly political interference in business law:

I won’t buy a socialist car, which means I won’t be buying a GM or Chrysler car for as long as the U.S. government owns huge blocks of the companies.

Today’s bankruptcy filing by GM will see the end of a once-great car company and the birth of a federal government-union partnership dressed up as a business.  It won’t work, even with the $50 billion federal tax dollars plowed into the new entity past and present, and not even with the UAW’s “concessions.” …

Buy Ford. Buy Toyota.  Buy anything that isn’t owned and operated by the federal government.  There are plenty of great cars out there.  You don’t have to buy one that costs not just your cash, but also your commitment to free enterprise and all the benefits that flow from it.

Just say no to Government Motors, and to the rush to corporatism and socialism that the Obama administration has pushed.

Update II: Keith Hennessey has the basics on GM and the deal.  Think of it as your personal Presidential briefing; he does a great job of dispassionately laying out the facts.