Fed Considers GM Buy-In: Digging a Deeper Hole

Not content with the hole it now occupies as a result of denying the obvious solution to the General Motors (GM) conundrum, the government plans to grab a bigger shovel and dig harder.

Bloomberg is reporting tonight that the Obama administration is considering swapping its existing debt for equity in a new, supposedly slimmer and profitable GM that would emerge from bankruptcy. The logic according to the article is that if the government swaps its more senior debt it will put pressure on the other creditors and the union pension fund to negotiate. Unfortunately, bankruptcy proceedings often develop a life of their own in which reason and logic can become seriously twisted.

Quoting a source, Bloomberg says that the union pension fund and the government would end up with most of the new equity while the other bondholders would receive only a sliver. They give no background or reasoning for that statement so take it for what it’s worth.

Even if the other creditors end up with more than just a “sliver,” the unions and the government will almost certainly control the company. From that we are expected to believe that a low cost, highly competitive world auto company will evolve. You may perhaps be envisioning a different scenario.

The government is averring that it will seek to sell its equity position if indeed it ends up with one. One is left to wonder who in their right mind would want to buy a car company in which your fellow shareholders are the unions with which you must negotiate. Maybe we can dupe the French into that one.

The consequences of all of this go far beyond GM. How does Ford (F) compete with the cost advantage a government-owned GM would enjoy? What clever plots does Congress come up with to force the non-unionized foreign manufacturers into the arms of the unions? Will government bow to other constituencies and dictate the nature of the product that GM turns out? If that comes to pass will they rig the game to force all others to follow along?

Government-owned car companies have a checkered history. Just ask anyone who bought a Renault once.

Comments

[Michael Terry:]

Question is, how does the government convert loans to GM Co, into equity of "new" GM? They cant take equity in current GM, because it would be wiped out in BK. Within BK, equity stakes in an emerged company are to be expected. The 363 sale within BK and the allocation of debt/equity within the structure should be determined by the court - unless the outcome is influenced/known/direc... Conceptually, this would violate the seperation of the branches of government. Welcome to the new world order.

Apr 14 11:46 AM

[CautiousInv...:]

An argument can be made that by the governement taking equity, it would make it easier for GM to force a restructuring plan on all other creditors in a bankruptcy because the Treasury’s secured loans give it a senior status.

Alternatively, the governement is uncertain of a bankruptcy outcome and wants to play a greater role in determining the ultimate outcome.

As the author notes, the idea of a company whose ownership is comprised of a state and a union does little to stir interest or enthusiasm, making the equity stake something less than marketable.

Let the bankruptcy court make the call.

Apr 14 11:48 AM

[R Wiggler:]

Renault is doing very fine now thank you.

Apr 14 11:58 AM

[Wadhamite:]

The Constitution does not allow for government ownership of horses, buggy companies, bicycle factories, or automobile manufacturers. Copying socialist Europe is no way to go. I doubt "Renault is doing very fine now"; it's certain Lada isn't, nor Dacia or Trabant.

Should either or both Chrysler and General Motors go down to bankruptcy, the proper thing to do is let Ford and the other domesticated imports pick up market share and do what they obviously have done better to this point.

Apr 14 12:16 PM

[2222:]

Wadhamite,

"domesticated imports" - get a grip. 50% of Toyotas and 46% of Hondas are still imported from Japan.

before we go encouraging bankrupcy we need think about what that means. the gov't pays either way. all those folks who's pensions go away are going to hit the gov't books. All that debt that gets lost leads to deeper recession and union jobs at $12 an hour makes for no more service economy.

level the playing field, really look at the new GM products, they are very good. Get the media to stop biasing toward imports. the people who bash GM need to understand that you are bashing your firends and neighbors and their liovelihood. We need to buy American real soon and support our home company.

Apr 14 02:05 PM

[Larrysyr:]

I seriously doubt this point. Governments foreclose and take all sorts of property by eminent domain or exercise of tax liens. In the case of GM, the sizeable secured loans give the government every right to foreclose in appropriate circumstances.

I certainly do not think it's a good idea for the government to run GM, but bad ideas are not necessarily illegal.


On Apr 14 12:16 PM Wadhamite wrote:

> The Constitution does not allow for government ownership of horses,
> buggy companies, bicycle factories, or automobile manufacturers.

Apr 14 03:13 PM

[casey00001:]

It makes me wonder if team O-Blame-a isn't complicating things so far beyond the scope of its weak business background that in the end, the solution to be arrived at is that GM has of course made great progress by June and should now get another 13 billion ballout bucks. Obama always does the most politically safe and easy action, always.

Apr 14 03:22 PM

[airglow:]

Huh???

I can't think of any electric vehicles available today that meet all three of your standards. Tesla does and Fisker probably will meet the first two, viable and street worthy, but they certainly aren't affordable unless you work on Wall Street and get bonuses 10 times the size of most Americans salaries. Even the viable part of those two has yet to be proven.

All of the other electric vehicles I'm aware of are hardly what any reasonable person I know would call "street worthy". They are all glorified golf carts that fall somewhere between a Smart FourTwo and a motorcycle for safety and usefulness outside of any urban core.

On Apr 14 03:02 PM chistletoe wrote:

> I now know of three separate start-up companies which are manufacturing
> viable, street-worthy, affordable electric vehicles inside the USA.
>
> Our government could launch a very credible "electric car race" with
> China along the same lines as the race to the moon 50 years ago.
> Such a race would benefit schools, technology, innovation spin-offs,
> jobs, energy independence, and if we win, restore a bit of the prestige
> of american ingenuity.
>
> Or, we can keep throwing money into the pit.

Apr 14 04:04 PM

[flipdog1:]

In 1968 a new auto could be financed for 24 months,comfortably.
In 2008,a new auto was financed for 72 months.This absolute increase in Cost ,in spite of advances in productivity due to robotics,subassemblies... in time logistics,was caused by increases in union salary ,work rules and benefits, even though the advances were funded by stockholder capital.Unions are the problem ,not a solution.

Apr 15 08:49 AM

[john s. gordon:]

remember michigan union members vote democrat.
maintaining some sort of employment in MI is required.
can't let all the auto mfg jobs go to right-to-work states (read dixie).
it's payback time.
> jack

Apr 15 09:03 AM

[harbi:]

Every one including the government don't seem to be thinking about car buyers and share holders. For the past two weeks I have spoke with over 50 people about GM going bankrupt, and I tell you over 80% said that those days they would not buy a car from a bankrupt company, even if it's GM and regardless of the government involvement and support. Why should they when they have many other and better options to chose from than buy a car from a company that is being fixed or rather rigged the wrong way. Good Luck, it may look good on papers and its an easy solution, but I'm sure they will later on realized that it was a disatrous one.

Apr 15 09:23 AM

[Paul Killinger:]

One nice thing about America is our freedom. If we don't want to work assembling vehicles for $14 an hour plus benefits, we're free to do something else. But if we do, we need to stop bellyaching about it and calling for work stoppages every few years. That's what got us into this pickle in the first place.

So today's question then becomes do you want to go to work for Fiat or not? It's your free choice. Their way or the highway. Just like every other employer trying to make a profit and stay in business, so you'll still have a job. And you're still free to leave anytime you want.

Apr 15 09:32 AM

[Miken:]

Another finance person pontificating. I'm going to be ill.

Let me tell you something Tom, you and your Wall Street pal's days are numbered. You have shown us that you cannot manage yourselves, let alone giving the car business advice....keep your advice. You people are always able to explain why today's market went up or down but fall woefully short when trying to predict the future. You are frauds and people like you are trying to perpetuate the illusion that you know something we don't. I for one, am sick to death of hearing it.

When you all fix your own business, give me a call. Another example of the unabashed arrogance of the financial world is criticizing the government for LOANING the car companies money is the complete lack of discussion on the amount of BAILOUTS given to the banks. Hello.....what about that?? How much went to the banks vs the automakers?? Never mind, we know.

Apr 15 05:40 PM

[Mad Taxpayer:]

This is "Change"


On Apr 14 11:46 AM BoneYard wrote:

> Question is, how does the government convert loans to GM Co, into
> equity of "new" GM? They cant take equity in current GM, because
> it would be wiped out in BK. Within BK, equity stakes in an emerged
> company are to be expected. The 363 sale within BK and the allocation
> of debt/equity within the structure should be determined by the court
> - unless the outcome is influenced/known/direc... Conceptually, this
> would violate the seperation of the branches of government. Welcome
> to the new world order.

Apr 15 08:20 PM

[a. palmer jr.:]

Won't Ford be at an unfair advantage not having the Federal Government on their side? You know very well how the Feds handle things..do you really think the auto industry will be any different?

Apr 16 12:21 AM

[Larrysyr:]

I question the assumptions about how comfortable people were in 1968 vs. are today.

Also, cars today last much longer and operate much more reliably than they did 40 years ago.

The largest part of the real increase in vehicle costs relates to significant safety improvements (seat belts, anti-lock brakes, stronger brakes, crush zones, etc.), and luxuries now considered satndard equipment (power everything, CD players, air conditioning).

Also, while it's easy and fashionable to blame the unions for the Detroit 3 problems, remember that management failed for decades in its responsibility to negotiate contracts in the companies' and shareholders' interests.

On Apr 15 08:49 AM flipdog1 wrote:

> In 1968 a new auto could be financed for 24 months,comfortably.<...
> 2008,a new auto was financed for 72 months.This absolute increase
> in Cost ,in spite of advances in productivity due to robotics,subassemblies...
> in time logistics,was caused by increases in union salary ,work rules
> and benefits, even though the advances were funded by stockholder
> capital.Unions are the problem ,not a solution.

Apr 16 11:42 AM

[chistletoe:]

I now know of three separate start-up companies which are manufacturing viable, street-worthy, affordable electric vehicles inside the USA.
Our government could launch a very credible "electric car race" with China along the same lines as the race to the moon 50 years ago. Such a race would benefit schools, technology, innovation spin-offs, jobs, energy independence, and if we win, restore a bit of the prestige of american ingenuity.

Or, we can keep throwing money into the pit.

Apr 14 03:02 PM