Tuesday, April 28, 2009
The GM bankruptcy and a test for American socialism
Larry Kudlow via Glenn Reynolds:
What is going on in this country? The government is about to take over GM in a plan that completely screws private bondholders and favors the unions. Get this: The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock. Huh? Did I miss something here? And Uncle Sam will have a controlling share of the stock with something close to 50 percent ownership. And no bankruptcy judge. So this is a political restructuring run by the White House, not a rule-of-law bankruptcy-court reorganization.
Look at the bright side, Larry. The federal government and the workers will own one of our largest and most storied industrial companies. That has never really happened before. In other words, the governmental restructuring of General Motors is a social experiment that will shortly teach us two things: Whether businesses can be managed to a profit when in the hands of bureaucrats and union officials, and whether American consumers will trust such people to stand by the products that they make. I, for one, am eager to learn the answer, because it will tell us what we should and should not do about health care.
67 Comments:
By 
, at
Tue Apr 28, 08:26:00 AM:
Unfortunately, I think that your timing is off. By the time we learn the answer about GM, we will likely already be well into Obamacare.
By 
The Conservative Wahoo, at
Tue Apr 28, 08:54:00 AM:
Great linkage to the healthcare issue, though I am not hopeful any lessons outside acceptable dogma will be embraced.
By SR, at
Tue Apr 28, 09:13:00 AM:
The Ford directors must either be frightened or elated depending upon how entrepreneurial they are.
Honda, Nissan, Toyota, I'm sure can't wait to compete with Obama Motors.
This brings new meaning to the old question. "Would you buy a used car from this man?"
By , at
Tue Apr 28, 09:16:00 AM:
Assuming this deal goes down as described, does the result negatively impact the bond market as a whole? It would seem that if some bondholders are more equal than others, then that would amount to added risk and would cause bond holders to demand higher interest rates, would it not? Or is this too isolated an instance to have an impact?
By , at
Tue Apr 28, 09:55:00 AM:
"Whether businesses can be managed to a profit when in the hands of bureaucrats and union officials,.. "
I can't believe you actually wrote that!
It is Enron time. The crooked politicians will use ways to cook the books. I'm thinking expenses and liabilities off the books so that "profit" is reached (and claimed) by crooked accounting rather than traditional definitions.
Who will buy a car made by government employees, government employees with lots of grievances? Few will, so the same crooked politicians will offer incentives based on political considerations. Thus, many inner city residents will acquire government cars cheaply (GM will record the sales at list prices with the difference written off against the funding for the original law and not GM's operating accounts). As these cars fail, we are back in the business of bailing out the UAW.
We will have "fairness" arguements. Is it fair for UAW to have pay and benefits lower than other government employees?
By , at
Tue Apr 28, 10:01:00 AM:
But for the probable fact that the government also controls more than few of the bondholders, this wouldn't be a close call. Obviously no one wants to own foreclosed, shut down auto factories in this recession, but the usual "playing chicken" a distressed debtor plays with a bondholder is mere kabuki this time around.
By Georg Felis, at
Tue Apr 28, 10:03:00 AM:
In light of recent events, I can see an advantage (in the minds of State-ists) here. If the government wants to destroy a business, all they have to do is let slip they are considering “investing” in it. The high-priced talent will flee, the bondholders will bail, and the company will fireball (being unable to raise capital or manage its operations). Then the government can come sweeping in like a white knight, and “save” it.
(begin sarc)
With that in mind, I foresee the government announcing plans to invest in Fox News, Lipton Tea, and all the oil companies.
/sarc
The country’s in the very best of hands…
By , at
Tue Apr 28, 10:14:00 AM:
Time for Tigerhawk to post a likely youtube link ... Indiana Jones, at the end of Raiders ... "we have top men working on it", "which top men?" "Top Men" ... or minds, but you get the point.
What a clusterf(*k ... just read Carville's belief that Dems rule for 40 years ... yeah. Like we'll just keep paying for that. If they wipe out the bondholders, rather than the commons, this does damage so far reaching that one wonders the impact on business.
By , at
Tue Apr 28, 10:15:00 AM:
oh, what the heck ... http://www.youtube.com/watch?v=7NbsevJtqCU
By Christopher Chambers, at
Tue Apr 28, 11:45:00 AM:
But think of this alternative storyline: could swine flu be a test for deranged conservative reactionary crap?
Look at it this way. That clown Rick Perry wants to secede from the Union...yet wants federal swine flu aid and counsel for Texas. Or...the GOP tries to kill pandemic research and containment funding in the stimulus, yet says "do something." I Failed Experiment #2's (Bobby Jindal) lead balloon screed about "volcano funding" might a tad premature when Yellowstone blows up and takes half the nation with it? Aw,shucks...but I'm getting SILLIER than you all.
One good thing about GM's travails: no more stupid commercials with Howie Long. Pontiac, for Buick. My grandfathers drove those.
By , at
Tue Apr 28, 12:37:00 PM:
UAW to own 55% of Chrysler. I will love watching these three die together[GM/Chrysler/UAW]. I'll never ever buy one again.
By , at
Tue Apr 28, 12:56:00 PM:
In re capitalism: Atlas Shrugged is currently sitting at #36 today. Does Amazon keep record books, because this has to amaze them as much as it does us!
In re socialism: In order for these investments of taxpayer and creditor dollars to make any sort of sense, even socialist sense, there has to be a belief on the part of the White House that the auto companies can develop some new, undefined markets for their products.
Someone should ask the White House Press Secretary what those markets are thought to be. I'd love to hear the answer.
By , at
Tue Apr 28, 01:09:00 PM:
Given the value secured debt holders in government controlled industries can expect to receive, I wouldn't want to be a secured debt holder in a bank today. When the realization sets in that security claims are being deemed worthless by the government that'll impact the trading values.
By , at
Tue Apr 28, 02:09:00 PM:
I am amazed that a group of creditors has not formed to force GM in to an involuntary bankruptcy. No creditor or bond holder will worse off under a bankruptcy plan than what the unholy designs of the UAW and the communist party have in store for them.
By , at
Tue Apr 28, 02:10:00 PM:
So, what happens when GM and Chrysler begin to fail miserably? Will the government establish regulations that are biased against Ford/Toyota/Honda?
By jaed, at
Tue Apr 28, 02:11:00 PM:
The federal government and the workers will own...
Did I miss something? I didn't see any provisions for worker ownership. The union will own part, but that's not even close to ownership by actual workers or a worker co-op. More like the union will own the workers even more than it does now.
I suspect GM would do better with a partial worker buyout than under the tender mercies of the UAW and a "car czar", but it's not likely to be tried.
By , at
Tue Apr 28, 02:13:00 PM:
The best solution for those of us who oppose what is happening is to "never again" buy one the the products made by GM. I stopped long ago and have been perfectly happy with my US-made foreign cars. They beat GM hands down.
By Thomas, at
Tue Apr 28, 02:19:00 PM:
I propose that GM be renamed "20th Century Motor Company."
BTW, why don't the bondholders file to force GM into involuntary bankruptcy? Surely they'd get a better deal from an impartial bankruptcy judge than from an Obama administration prejudiced in favor of the UAW's unsecured interest. I would think GM's default on a billion-dollar debt payment counts as "generally not paying debts as they come due."
By , at
Tue Apr 28, 02:32:00 PM:
I still own two GMs. The trucks still can't be beat by anything else out there, but the minivan was disappointing.
It's time to cancel that GM Mastercard, I'll never be buying another GM. The government is shutting down the good part in the name of "green" politics and the union and GM shareholders are rolling over for it.
By , at
Tue Apr 28, 02:33:00 PM:
Of course GM will be competitive with other automakers. Who do you think will win any government contract to supply cars/trucks? Taxpayers will keep GM competitive with billions of addition dollars from 'stimulus' spending.
By , at
Tue Apr 28, 02:36:00 PM:
A government owned and operated GM is guaranteed to be profitable and successful. I mean, how many unsuccessful government programs are there? Since the government keeps funding the programs they must be successful. And when laws are passed such that GM vehicles are required to be bought (or other makes forced out of the market), how could they lose?
By DADvocate, at
Tue Apr 28, 02:39:00 PM:
Given that GM is killing Pontiac and keeping Buick, they are well on their way to failure.
By , at
Tue Apr 28, 02:47:00 PM:
"the governmental restructuring of General Motors is a social experiment that will shortly teach us two things: Whether businesses can be managed to a profit when in the hands of bureaucrats and union officials, and whether American consumers will trust such people to stand by the products that they make."
The data are already in on both questions. Look no further than Amtrak to see what is in store both for Government Motors; a bloated bureaucracy mostly producing a product nobody wants but satisfies the visions of a few bureaucrats and politicians and sucking $ billions from the taxpayers year after year with no end in sight. Expect the same for Single Payer Health Care as well except now the sum will be $ trillions.
By , at
Tue Apr 28, 02:47:00 PM:
"This brings new meaning to the old question. "Would you buy a used car from this man?""
It also brings to mind the question, would you buy a new car from this man? The answer is no, never. No more GM cars for me. Probably no more American cars for me as long as there is a UAW.
By I'm Full of Soup, at
Tue Apr 28, 02:48:00 PM:
Slight correction for you...We The People now own a car company not the federal government.
I, along with all my fellow Americans, will be checking my mailbox for my stock certificates.
By Cardinalpark, at
Tue Apr 28, 02:48:00 PM:
Actually, versions of this movie have been played before -- most notably (from a scale perspective), United Airlines.
They revisited bankruptcy.
In truth, labor ownership of the auto companies was inevitable in light of the first priority claim of their pension liabilities.
If you want to see what tends to happen when government and unions own businesses, go to Argentina. It ain't pretty. In addition to staggering incompetence, you get evn more staggering corruption.
By , at
Tue Apr 28, 02:50:00 PM:
Anonymous is quite right. The danger we face is that the Obama Administration will force ALL automobiles sold in the US to satisfy arbitrary "green' specifications. The government has the power to make all cars sold in America to be very expensive and technologically inferior.
By , at
Tue Apr 28, 02:58:00 PM:
I don't recall ever hearing that the bond holders agreeing to this cram down. Most of those bonds are insured by AIG for 100% of face. Bondholders WANT GM to go broke -- they get all their money back, not just 10 cents on the dollar.
By , at
Tue Apr 28, 02:58:00 PM:
Very, very BAD analogy. Yes, put us on that train to the camp you are talking about. No, idiot! Remember this: Without bond investors in the first place there would not be a company to even talk about. If this had happened in Russia: the government ruler comes in and takes 89% of the company with their political voters you would GET IT. Wake up people. Its cool when its the other people.
By , at
Tue Apr 28, 03:00:00 PM:
People lump all bond holders together as if its one big rich dude with a cigar that you can forget about. NO. Not very many bond holders have insurance.
By , at
Tue Apr 28, 03:05:00 PM:
Is anybody dumb enough to buy a car made by people who basically hold a government job and are generally pissed off about something or other anyway?
The company has no incentive to make a profit! They will be managed by the EPA and churn out cars nobody will want or buy.
Why not just build Trabants and try and sell those?
By , at
Tue Apr 28, 03:07:00 PM:
UAW ownership, whether minority or majority ownership, should prove very interesting. Now they will have directly conflicting interests .... I'm going to enjoy seeing them try to resolve the conflict.
By , at
Tue Apr 28, 03:08:00 PM:
The government is taking 50% of the company. They are giving another 39% to their political peers. People don't realize what is happening. We are a socialist/communist country under this. Government NEVER should have been involved in the first place. Bankrupt with gov and bankrupt without gov. The only difference is that by government elite giving money they gain control. Get it. Communism. Otherwise it would have been rightfully decided among the actual true stakeholders.
By , at
Tue Apr 28, 03:16:00 PM:
I will add my voice to the others that will decline to buy an Obama motors/UAW car. I don't care how incentivized they become.
Instead, I see a boon to the used car market for your average joe. An inclined individual can keep a car going a long time indeed.
I have 2 vehicles that are 12 years old now, and nothing but used for me from here on out.
Besides, I hate the waste of paying sales tax.
TJ
By , at
Tue Apr 28, 03:49:00 PM:
By , at
Tue Apr 28, 03:57:00 PM:
I'll never buy a GM vehicle as long as the Federal Gov't runs the company. They'd have to pay me to take one off their hands.
"Honda wa ikura desuka?"
By , at
Tue Apr 28, 03:58:00 PM:
Isn't this a classic government takings without just compensation?
By , at
Tue Apr 28, 04:07:00 PM:
Only in the sense that the assets might (maybe) have brought more under the hammer. But the bondholders can prevent even that from happening, if they so choose, simply by filing an involuntary petition. That petition would be accepted by the court since the company has already admitted it's insolvency.
The simple fact is there are no visibly competing bids for these assets. Is that because no one wants to fight "city hall"? Is that because no one could get a loan from the government owned banks to compete with the government bid for the auto companies? Hard to say, but without a petition being filed against GM we'll never know.
By RobertL, at
Tue Apr 28, 04:13:00 PM:
Well. you're right about the healthcare part; but not only willl we learn the answers way too late, nobody will EVER admit the truth when they find it out....
By , at
Tue Apr 28, 04:47:00 PM:
At one point I heard that there were close to $1 trillion in credit default swaps out on GM bonds (you don't have to own them to bet on the default). Anyone know what the real number is these days and how that gets handled? I'll bet AIG wrote a huge chunk of those.
By , at
Tue Apr 28, 05:03:00 PM:
Wouldn't it be great if Citi and BofA owned a big chunk of the winning side of that bet? So much for TARP, Talf, guarantees and extreme oversight, and the White House would learn a very valuable lesson on markets.
Dream on. It's never that easy to teach idiots.
By , at
Tue Apr 28, 05:03:00 PM:
You're just missing out on the big picture. Once the government has taken over most of the banks, they'll only approve auto loans for GM cars. For the good of the country, you know. So the government run GM will do just fine!
By , at
Tue Apr 28, 05:46:00 PM:
All the US auto companies were the participants and now are the victims of a large scheme to externalize the costs of the benefits provided to UAW workers.
At first it worked because the US auto buyer had no real choice. He had to pay whatever the price was. Now that there is a choice, we see the cost and so many of us have voted with out wallets, that the scheme collapsed.
Indeed, this has gone the way of all socialist attempts to externalize costs: they work until they run out of other people's money.
Happily, I can exercise my one last vote for this horrid debacle: I will never buy a new GM or Chrysler vehicle. Beyone the money thrown in the hole by the government bailouts, let someone else pay the bill.
By , at
Tue Apr 28, 05:49:00 PM:
Two words.
British.
Leyland.
I owned a 1977 Triumph. Lord help us.
By Patrick, at
Tue Apr 28, 05:54:00 PM:
We're making it through a swine flu epidemic without anyone in charge at HHS.
Enough said, IMHO.
By Patrick, at
Tue Apr 28, 05:57:00 PM:
I can't believe nobody's mentioned... Iowahawk!
By , at
Tue Apr 28, 06:22:00 PM:
By SR, at Tue Apr 28, 09:13:00 AM:
The Ford directors must either be frightened or elated depending upon how entrepreneurial they are.
Honda, Nissan, Toyota, I'm sure can't wait to compete with Obama Motors.Probably frightened. Why keep talking about competing? Those posting about not buying Obama Motors vehicles aren't getting that the coming mandates and attached taxes will limit the types of vehicles people will be able to "choose".
You didn't want to support unions by buying their products, America? Well, they'll show you know.
By , at
Tue Apr 28, 06:24:00 PM:
That's "now".
Stupid spell check.
By davod, at
Tue Apr 28, 06:37:00 PM:
TH:
Your comment regarding whether the Unions and Obamites will be able to run a profitable operation is redundent.
It won't be allowed to fail. The FED will print money so the Obamites do not hyave to go to Congress for money.
Oh! and those other car manufacturers, they will leave once they realise they cannot compete with a government subsidized opposition.
Does the modern operation of the Russian govenment ring a bell here?
Ford will likely fall by the wayside unless the oompany accepts government funding and a 40-50 % share given to the unions.
By , at
Tue Apr 28, 06:48:00 PM:
Blogger is missing an important point. When nobody wants to buy the pieces of crap which the green socialist want to sell for 4 times the amount of competitors. Obama and his communist friends will begin by offering a "subsidy" for each car. Which means that not only will the taxpayers be paying for your slum neighbors house but also part of his car.
That will be followed by Obama using the full force of the government to drive up the cost of the competitors, with tariffs, penalties, mandated "employee" costs, etc. All in the name of fairness, of course.
If you think that the people who have bulldozed thru 65 billion dollars a day since election are going to allow this experiment fail, you are gravely mistaken. By the time Obama is out of office, the debt will be in the 25 trillion range, if not more.
By davod, at
Tue Apr 28, 06:50:00 PM:
I just remembered something that happened in Perth, Australia, in the 70s when the Whitlam Labour (Democratic) government was in power. The unions had always had a lot more power than in the USA but their sway was even greater with Whitlam to bully everyone as well.
This company was forced to unionize when the govermnent would not enforce its own arbitration rules. The owner of the company was a POM (Brit) and had experience in the UK with Unions. He closed down the company rather than unionize and at the least hundreds (I cannot remember the exact number) lost their jobs.
Everyone was shocked because this just wasn't done.
I would not be surprised if this did not happen with one or more of the foreign manufacturers. At least I hope one of them has the integrity to do this once they realize the fix is in.
By tomthesubmariner, at
Tue Apr 28, 07:19:00 PM:
Who's going to buy Corvette. The Toyota Corvette has a ring to it.
I'm a long time Corvette owner.
By kentuckyliz, at
Tue Apr 28, 07:32:00 PM:
Unless Corvettes start running on unicorn farts, they aren't green enough.
I applaud the Oz Pom business owner for going Galt.
I always liked bicycling and I think we're all in for more of it. I thought so last summer but that was about the price of gasoline. I thought it was ironic that (due to the expanding middle class in India and China) those folks were driving more, and because of our high gas prices and SUV's, we'd all be switching to bicycles. Trading places.
Since the Kelo decision, I don't think the bond and share holders would get very far, because there is such a broad construction of the public interest.
I alternate between wanting to hit the streets in mass protest (crickets chirping) and despair. I think I'll just drink until 2010/2012 rolls around. Might as well have a good party while the Titanic goes down.
By JPMcT, at
Tue Apr 28, 07:55:00 PM:
Boy, the next president is sure going to have a colossal mess to clean up!
By , at
Tue Apr 28, 07:59:00 PM:
Just a tangential point here: Why would you link to Glenn Reynolds' republishing of Kudlow's comments, rather than link directly to Kudlow's post?
National Review is the entity that invested the resources allowing Kudlow's thoughts to be communicated. I just don't understand why you would deny them the courtesy of attention and hits. You've instead given that courtesy to somebody (Reynolds) who was merely feeding off their effort in the first place.
This is a real problem with the web, I think, and with the way people have come to engage with content. Content creators and providers are not being rewarded -- or even merely acknowledged -- in the way they should be.
You may think I'm making a mountain out of a molehill, and I suppose in one sense I am. But really, I see this sort of thing as symptomatic of a far bigger phenomenon -- a phenomenon that's pretty depressing, when it comes down to it.
By , at
Tue Apr 28, 08:09:00 PM:
TH: Thanks for posting Kudlow's comments from Instapundit. NRO WILL NOT OPEN on dial up.
By , at
Tue Apr 28, 08:44:00 PM:
They have made this so simple. People who hate the UAW, socialism, and this administration need to boycott Government Motors and Chrysler, for ever.
By , at
Tue Apr 28, 08:46:00 PM:
There you go, Anonymous. Charge right past the actual substance of my comment and give him the out he needs.
Yeah, the lack of even mere acknowledgement for National Review is because it DOES NOT OPEN on dial-up.
Okey doke.
By , at
Tue Apr 28, 09:33:00 PM:
Pedant point.
What Obama is practicing is not socialism but is accelerating is the union of corporate and state power. This convergence is called "corporatism" and is the economic foundation of fascism. Add a sizable social welfare element and you have the so-called "Third Way" of Peron's Argentina.
A disaster by any name.
By , at
Tue Apr 28, 09:45:00 PM:
It seems rather bizarre that the liberals who HATE American cars and have never owned one will now call the shots at the largest manufacturer of American cars. Good luck with that.
By , at
Tue Apr 28, 09:52:00 PM:
All of the bailouts are a taking without just compensation. The private property owner owns a certain percentage of a company worth a specific amount. The government dilutes the percentage of ownership with a bailout and the private property owner ends up with stock worth less than before the government's action. What is a company other than individuals who own percentages of the company. The government is reducing the value of ownership by diluting the percentage of ownership. Even if the taking is justified by "the public good", the government must give just compensation. Brisch
By John, at
Tue Apr 28, 09:54:00 PM:
I never got that "managed to a profit" when it came to government-worker, or socialist, models. Where does the profit go? Do the government and workers just get that much wealthier. I can't imagine much innovation coming out of this enterprise, and unless the feds heavily subsidize the American people into buying these cars, are there going to be many sales, when they turn out to be inferior to most imports? Or am I jumping the gun? Should we see if this...experiment..."works"? And what is "works" anyway? How do we determine success in such a situation? Will the Feds even let it fail?
By , at
Wed Apr 29, 08:11:00 AM:
Has anyone considered the opportunities for Going Galt with our car purchases? All we have to do is not buy any General Motors or Chrysler products? And just not new cars, let the old clunkers sit on the car dealer’s lots as well; the used parts business is a very locative revenue stream for the car industry. Don’t buy any socialist cars. Don’t support the looter state!
By , at
Wed Apr 29, 09:44:00 AM:
All of the bailouts are a taking without just compensation. The private property owner owns a certain percentage of a company worth a specific amount. The government dilutes the percentage of ownership with a bailout and the private property owner ends up with stock worth less than before the government's action.Like many blanket statements, this one is wrong as often as right. In the case of GM, it seems to me to be manifestly wrong.
How is the government bid for GM a taking (except from the taxpayers)?
Common equity was essentially zero the moment GM took their $27 billion in government loans (three tranches beginning last year), and all outstanding common shares became an option bet on recovery of the company from that moment forward. The common equity had no economic value in an asset sale at that point, and so this offer is not a taking.
The holders of GM bonds, especially the secured bondholders, have the ability right now to decide if the deal proposed by the government suits their interests, or if they would like to pursue thier rights in a bankruptcy court. That right is not diminished, and the value they can expect to get in a court filing is theirs for the taking if it suits them.
The government has merely proposed an out of court settlement that offers a different scenario to the parties, but the bondholders, secured and otherwise, retain all the power right now. Since they can choose to take the government bid or to file based on their creditor position, this bid is not a taking.
As I said earlier, there are no other offers of new money for GM on the table. There is only the government bid, which is essentially a massive transfer of government money to union control. If the bondholders don't like the deal on offer they can file against GM and find out what the under-the-hammer value of the assets might be in this terrible market for asset sales. The government cannot stop that from happening. The bondholders are fiduciaries and they have a fiduciary obligation to assess the two possible options and make an economic decision: Which option gives the bondholders a better economic deal?
If you want to argue the GM creditors are being intimidated by the government to act in accordance with government desires, the way Ken Lewis is claiming he was intimidated in the BofA/Merrill deal, then the bondholders are making a big mistake becasue Ken Lewis is going to get sued for his deliberate decision to ignore his duty. The bondholders are acutely aware of that risk, I'm certain, and are watching the Lewis matter unfold. Whatever decision the bondholders make in the GM matter is going to be well documented, as transparent as they can make it, and well articulated to their clients. But it's no taking.
By , at
Wed Apr 29, 05:02:00 PM:
" ... So, what happens when GM and Chrysler begin to fail miserably? Will the government establish regulations that are biased against Ford/Toyota/Honda? ..."
Bingo. A used Toyota or Honda will be worth its weight in gold.
By , at
Wed Apr 29, 05:17:00 PM:
Why is it that the one intelligent rebuttal (thanks 4/29/ 0944) is always at the back and days too late?
Kids, the bond holders want, metaphorically, $50 billion back from an unprofitable company with $5 billion in assets. The money's not there. If they want someone to blame for that, I recommend Rick Wagoner, with an assist to G*d for providing only a finite supply of fossil fuels and a steadily rising gas price. And another assist to Alan Greenspan.
The real question is, Tigerhawk, if and when GM's fate turns around under UAW ownership, will you revisit your superstitions?
By GM Desk, at
Thu May 14, 01:37:00 PM:
As thousands of General Motors workers await word on more U.S. plant closures, reports that the company plans to import Chinese-made vehicles to the U.S. have created a political problem for the automaker and the White House. http://pfx.me/BJ
