Friday, November 19, 2010
The NYSE, which seems to have up-regulated its propaganda arm in recent months, sent around an email to we corporate tools with photos from yesterday's "initial" public offering of the common stock of General Motors. I rather liked the one below. And, yes, the scare quotes around "initial" are totally appropriate.
The USA lost money the day it invested in GM. The right benchmark was to use Ford as a comparable, in which case GM needed to be worth at least 7/4 to Ford to make it break-even. It wasn't then, and it's not now.
I don't necessarily mind "investing at a loss" for a bigger public policy goal, but the entire deal was structured to put the UAW -- and particularly its retirees -- at the front of the line with no haircut.
The tax benefit of net operating losses gets lost when a company runs through bankruptcy, but not here. It was only recently revealed that New GM got a special one-off break to use Old GM's NOLs. That's worth about $10 billion, which means an extra $2 billion bone got thrown to the UAW.
There's a falsehood that keeps getting repeated that Obama & Co abused the bankruptcy process in GM to re-order the priority of secured creditors vs. equity holders. It's not true.
The GM deal was an aggressive use of Bankruptcy Code 363 -- which allows for a sale of assets out of bankruptcy to a designated buyer on the condition that other stakeholders -- or anyone for that matter -- can come in and make a higher bid. "363" sales are often used for sales of stand-alone divisions of bankrupt companies. What was aggressive in the GM situation was the size of what got sold, both as a percentage of the GM bankruptcy estate and the aggregate dollar amount -- but there's precedent for this and it was legal.
The debtholders could have used the face value of their debt as part of a consortium bid, in which case they could have topped anyone, if they wanted to. But they didn't. That's because -- on the numbers -- GM wasn't worth saving. On the numbers, GM should have been liquidated. In which case debtholders would have gotten less, or more likely -- nothing.
So GM's secured creditors didn't get screwed GM, and actually got more than they should have had the USA not intervened.
So who got screwed? ... the US taxpayer ... and Ford, Toyota, etc
The USA lost money the day it invested in GM. The right benchmark was to use Ford as a comparable. We invested in GM on the basis of an implied $70 billion pro forma valuation at a time when Ford's market cap was only $40 billion. GM wasn't worth 7/4x Ford then, and it isn't worth 7/4x Ford today.
So who won? ... the UAW.
We can argue whether "investing at a loss" for a bigger public policy goal was justified with GM, but the entire deal was structured to put the UAW -- and particularly its retirees -- at the front of the line with no haircut. In effect, Obama handed the UAW pensioners $10 billion. The left says "we're all in this together", but it always works out that some pigs are more equal than others.
It's all about the optics.
It's important for Obama & Co to claim that the USA hasn't lost that much on GM. So they take credit for anything good that happens at GM including interest and dividends paid, and the market appreciation that automakers have enjoyed over the last year, etc.
But that still wasn't enough, so Obama & Co threw in $45 billion of net operating losses (NOLs). Ordinarily, the tax benefit of NOLs gets lost when a company runs through a bankruptcy 363 sale, but not here. Somehow Treasury found a way to give a one-off ruling that New GM could carry over Old GM's NOLs -- they have an NPV of something like a $10 to $15 billion. This is unprecedented, and I doubt it will be repeated.
This was a key selling point during the IPO and served to boost GM's valuation. To the extent that the USA is an owner of GM, we're just moving money from right pocket to left. But to the extent that the UAW is an owner it's getting another $3 billion or so in value as a handout from the USA.
The UAW's investment in Obama has had a remarkably high ROI, hasn't it?
More than I needed to know, Anon, although i appreciate the explanation of how owning preferred stock can turn one into a UAW contributer.
That violated the basic idea of the purchase.
If you buy into this crap sandwich, you will regret it.
"More than I needed to know"
The devil is often in the details. We get little true investigative journalism out of MSM, including Fox. So I do my own.
In the Progressive Paradise that's the State of Michigan, the UAW -- and especially its retirees -- are at the top of the food chain, and are being kept there thanks to the detail of the GM Bailout. That's the unreported story re: GM. Collectivism always sounds good in theory, but it's always less than "fair" in practice. Here's but another small example.
Further, when you understand the details of the GM Bailout, you can see how Machiavellian "smart" Obama & Co can be when it comes to "working" legislation and regulations. It's what they do. Be afraid.
No! The unreported story here is that the Obamites chose to benefit one union group over another.
In doing so they also managed to turn the normally accepted standard on its head (Yes. I know the plan was approved by the judiciary. So what.)
Not only that but they chose to villify anyone who got in their way.
"Further, when you understand the details of the GM Bailout, you can see how Machiavellian "smart" Obama & Co can be when it comes to "working" legislation and regulations. It's what they do. Be afraid."
This is a keeper.