7thriv

The Car Czar hath spaken unto GM's stakeholders and doth proclaim that American manufacturing will be saved only if GM's bondholders take a 90% haircut in which they exchange their valuable bonds for worthless shares in a company that may go bankrupt no matter what anyone else does: G.M. Latest Plan Hinges on Debt Exchange

The company is still negotiating with the United Automobile Workers union. The government wants the union to accept company stock to finance half of G.M.’s $20 billion obligation for retiree health care.

If bondholders approve the debt-for-equity exchange, they would own about 10 percent of G.M., making them a minority shareholder in a company controlled by
the Treasury and the U.A.W.’s retiree trust.

According to the offer, the Treasury would own at least 50 percent of G.M. in
exchange for forgiving about $10 billion in federal loans. The union trust, in
turn, would receive a stake of about 39 percent.

A committee of big G.M. bondholders on Monday called the offer a “a blatant
disregard for fairness for the bondholders” and an example of “political
favoritism” toward the U.A.W. “The current offer is neither reasonable nor
adequate,” the committee said.

First I would like to throw a little negativity towards those "free marketers" lining up to declare this the Death of Capitalism. The capitalists and workers at GM killed this company, not the gov't. Not one of the stakeholders pressing for their rights lifted a finger during the years when GM was burning through billions of dollars in an unsustainable quest to maintain its status as the world's biggest car company whle making worse cars than its competitors. GM's management had to wear a lot of straightjackets over the years: dealers they could not easily slough off, union work rules that interfered with efficiency, unsustainable health and pension benefits, factories they couldn't close, gov't regulations that created perverse results such as the "two-fleet" rule that saw GM building completely different lines of cars in Europe., etc. But, there was never a time when they tried to lift those straightjackets off until it was too late.

And, the idea of a major car company with the gov't and the union as majority shareholders is hardly unprecedented. Volkswagon operates under a similar ownership structure, and they do a good job building cars people want to buy.

Still, the GM "deal" is completely irrational from an economic and political view. Why are GM's lenders the ones to take the greatest fall for GM's mismanagement. Under normal circumstances, they could look to BK court for a better deal. Better yet, they could negotiate a real debt-to-equity swap and take over GM themselves. The gov't is essentially taking their contractual right to do this. How does this not violate the Takings Clause?

The UAW gets way too much, for its part, and perversely its workers get too litte. More job and benefit cuts are on the way, and yet the union is coming out stronger than ever. Whose jobs are being protected? The union bosses or the workers? GM is also accelerating the shrinking of its dealer network. What about the mechanics and support staff? Their taxes are going to fund the UAW's largesse, even if they are in an economically more precarious position? This is the sort of equality were heading toward? Apparently,

Chrysler, meanwhile, has reached a similar agreement with Fiat and the UAW:

The U.A.W. this weekend agreed to a similar health care deal with Chrysler, which has borrowed $4 billion from the government and hopes to get $6 billion more. The union’s new retiree health care trust would own a majority stake in Chrysler in exchange for helping the carmaker save $4.5 billion.

A summary given to union leaders said Fiat would ultimately own 35 percent and that 10 percent would be held by the government and Chrysler’s lenders, two people with direct knowledge of the deal said.

Chrysler would give the union a 55 percent stake to cut its obligations to
the health care trust in half, said these people, who spoke on condition of
anonymity because details of the agreement have not been released publicly.

The deal suspends cost-of-living pay increases, limits overtime pay and
reduces paid time off. It also eliminates dental and vision benefits for
retirees. It also provides for Fiat to begin building cars in at least one
Chrysler plant.

How Fiat - a foreign car company that hasn't sold cars in the US for 20 years - has benefitted from this largesse is beyond me. It's putting no $$ into this deal, and is receiving a US factory and dealer network in return at gov't expense. How is this fair to the taxpayers or to American interests?

The bondholders are essentially being dared to oppose this "deal" so that they can be the bad guys if GM or Chrysler go under. The union guys get all the sentiment and songs. John Sayles is never going to make a movie about noble bondholders standing up to corrupt union bosses. But, those union jobs are not going to be worth much if GM can't sell cars and can't get financing - two of the bedrock basics for any business to survive, but which the new stakeholders seem to consider superfluous details. If I were Ford, I would do everything I could to get out from under the cloud of the union and the gov't. Troubled times have come to their hometown.