GM = Chrysler Redux

I have not blogged much in the last week on the Obama takeover of GM, but you can take all my old Chrysler posts and just substitute "GM" for "Chrysler" and you will have it pretty much straight.   Having gotten away with hammering secured creditors in favor of the UAW at Chrysler, Obama is setting the same course at GM.  Via Q&O:

The United Auto Workers retiree health fund is set to own as much as 39 percent of the restructured GM, in exchange for giving up its claim to at least $10 billion that the company owes it....

The chief obstacle to an out-of-court settlement for GM remains: There has been no agreement between the company and the investors who hold $27 billion worth of GM bonds.

Under orders from the Obama administration, GM has offered to give the bondholders a 10 percent equity stake in the restructured company in exchange for giving up their bonds.

Hmmm...  let's give unsecured creditor the UAW a 10x better deal than the secured creditors.  No wonder Obama wants to keep this out of bankruptcy court -- laws and contracts and stuff actually would have to be applied there.   But the company will be set for the future -- the US and Canadian governments will control a majority of the board seats, with the rest presumably controlled by the UAW.  Does everybody believe me now when I say we are heading toward a European-style corporate state?

The only thing standing in the way, of course, is those pesky secured creditors, who are actually holding out for what they are legally and contractually due.   Obama's got a bit more difficulty here at GM than at Chrysler because a smaller percentage of the secured creditors are TARP recipients, and therefore he has less leverage to make them give up their rights  (at Chrysler, the TARP majority was pressured successfully into selling out their non-TARP brethren among the creditors).

Of course, Obama has the advantage of Chrysler as a precedent, which makes it pretty clear why he set Chrysler up as the first to be intimidated, as he had the most leverage over them with TARP recipients in the creditor group.  Interestingly, this is very similar to how the UAW has always dealt with the Big 3, targeting the most vulnerable for pressure in contract talks, and then using that settlement as a precedent in the rest of industry.  One wonders if the UAW hasn't been whispering in his ear through this whole process.


  1. Max:

    Well, perhaps finally the creditors (or companies in general) grow some spine and tell those administrators off, but I have no high hopes. It is incredible how easy even big companies who usually have good PR teams, are so helpless when it comes to fight the government in the medias Oo Don't they have got any arguments, or do they fear that their shallowness when it comes to principles would ruin any argument beforehand (if so, it is the same with politicians)...

  2. m:

    "One wonders if the UAW hasn’t been whispering in his ear through this whole process."

    Actually, one doesn't wonder.

  3. elambend:

    We'll see if they're any good at making and selling cars. We'll probably have to prop them up for a while, but I can't see such support being politically viable through too many election cycles.

  4. Jeff:

    I hope the GM deal blows up, but if it doesn't, I expect great comedy to result from an EPA designed car, made in a UAW owned factory, and marketed by the people who create public service announcements.

    It will be a train wreck of biblical proportions.


    Full disclosure: Our family business is selling Toyota's.

  5. Dr. T:

    What puzzles me is why the GM secured creditors haven't filed suit in federal court about Obama's end-run around normal bankruptcy procedures. Obama hasn't had time to stack the courts, so this case seems like a slam-dunk for the secured creditors. Are they just waiting, or am I not seeing their reason for avoiding the courts?

  6. Mesa Econoguy:

    This one could get quite interesting. Political battle lines are being drawn, now that the template for the seizure of the company/refutation of creditor legal standing is known:

    US House Republicans back GM bondholders in talks

    It will not be as easy for Obama to simply steer this one into a section 363, at least not as quickly or easily as Chrysler. Bondholders are being given political cover, or standing to fight this case. This one may be (partially) decided in Congress, and it would be very instructive for this to become a noisy and contentious fight.

    Of course, many GM bondholders simply liquidated after Chrysler creditors were illegally disenfranchised.

  7. John IV:

    I dont think it will matter much who actually owns the company since 2 things are very likely to happen.

    1) People are going to buy Asian cars for the near future because they cant even guarantee that thier warranty will be still be valid in 6 months. Not to mention whether parts will be available to fix thier new cars!

    2) This will force US automakers to have to woo back even MORE buyers from the foreign Markets, Of which they have had almost ZERO success at in the past 30 years or so.

    3) Private creditor's wont be investing in stocks or bonds in any american automaker for even longer. Banks and the federal reserve will be the only place these guys can get money to do ANYTHING in the near future.

    Whats going to happen to stocks and bond prices in any industry that the government turns it's sights on next? Care to take a wager? ;)

    The US govenments history of running companies can be summed up pretty simply. The Government couldnt make money selling hookers and booze in Nevada. You think they can sell cars Nationwide? Good luck with that.

  8. Mesa Econoguy:

    Spot on, John, here’s more (yesterday’s WSJ):

    In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

    When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.

    Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

    Why Government Can't Run a Business

    Of course, as we all know, Obamalini & Co. are smarter than anyone else, and they'll do it right. We just need the right people (them) doing it....

  9. John IV:

    I suppose the inevitable result will be US policymakers finally getting to tax/tarrif the crap out of every foreign manufacturer, till toyotas cost 3x as much as a FED car.

    I can see a quota system on the number of cars that MUST be made.

    They will make the CHEAPEST, Fastest to make, UNSELLABLE, vehicle they can to meet the quota. (see Russian Carpentry Nail Manufacturing under communism ;))

    Then add Some sort of incentive that has auto plants MAKING these cars, then trashing the cars at the scrap yard next door and getting a nice Recycling Carbon Offset credit as well as a tax credit, and make money selling the offset for more than they could get for the car. Less the tax credit, ALL PROFIT... and they still get to claim they are a "green Company"

    Hmmm.... Did that seem a tad too cynical? :)

  10. Link:

    Obama will soon control GMAC, which is now a bank -- and agressively seeking deposits. We can expect GMAC to aggressivley finance the purchase of Obamamobiles. This would make the federal government a zaibatsu, something prohibited by the Bank Holding Company Act. We enacted the BHCA to expressly separate industry and banking, so another cornerstone to our legal foundation is being struck down.

    If you're from any of the several states that make Toyotas or Hondas, how long will you put up with your own federal government "dumping" product at a loss. Will Kentucky be forced to bring an action before the World Trade Orgnization against the US?

  11. Corky Boyd:

    There 's still a good chance the Chrysler "deal" will fall apart. Fiat is getting cold feet, and other creditors are suing for a reading on the constitutionality of the uneven treatment of creditors in a different court. The disparate treatment is a separate issue (5th Amendment) the 2/3 value, 50% of creditors which satisfies the bankruptcy laws.

    My personal opinion is there is no way Chrysler can make it as an independant entity, and Fiat won't pump in $15 to 20 bil. to keep it alive. Merging the two was the plan all along. It's just easier as a two step operation Even at that, Obama (no, really us) will have to pick up the tab of about $60-80 bil. Now for combined Chrysler/GM US sales of about 3 to 3 1/2 million, we will have to put up roughly $2,000 to 3,000 per vehicle.

    Even these sales figures are optimistic. It doesn't factor in the public's political animus against an Obama run car company.

  12. Raven:

    GM's mom and pop investors gird for battle:

    I hope they win.

  13. HS:

    Secured debt is not the problem for GM as it was for Chrysler. In Chrysler's situation, the administration used the leverage through the TARP funds to get 70% needed to over-rule the minority secured debt holders. The 363 sale may still fall through as someone said because the assets being sold must be greater than the liens on those assets. That is a slim chance when most of the secured lenders have no recourse because of TARP. In GM's case, the secured lenders are safe but the unsecured lenders will be the ones getting wiped out... normal in a bankruptcy.