Following the General Motors IPO, the dust has settle on the bailout, allowing us to identify the winners and the losers. The results are startling, yet not surprising.
With significant input/support from the Obama administration, GM just re-entered the public market by floating a $20 Billion IPO, primarily on behalf of the four largest shareholders, the US and Canadian taxpayers, the United Auto Workers union (through its Retiree Medical Benefit Trust or “VEBA”) and Motors Liquidation Company, the former General Motors (now bankrupt).
This represents the largest IPO in history and opinions vary whether the bailout turned out to be a great success or perhaps something less. Obama praised it today claiming it saved millions of jobs and that the America and its people are coming out on top. Others disagree. There’s much dialog surrounding this event and a lot of it’s inaccurate so, before we highlight the winners and losers, let’s to set the record straight on some very basic matters.
Contrary to the administration’s spin, had we not bailed it out, GM wouldn’t have died nor would millions more have lost their jobs. It was a lie designed to create the illusion of crises. American bankruptcy procedures don’t automatically involve shutting down operating companies. Just look at the recent bankruptcies of K-Mart, Pacific Gas and Electric, Texaco, United and Delta Airlines to name a few to know this is the case. In fact they are specifically designed to keep companies operating and workers working while they deal with their economic problems…. like uncooperative creditors and unions.
Ironically, despite the stated reason Obama gave for the bailout in the first place (to keep GM out of bankruptcy) it went bankrupt anyway. The only difference now; under the Obama structured bankruptcy, the terms changed considerably along with the outcome for some very key players.
In truth, the GM bailout was not a rescue package for the company nor was it designed to protect the American economy. GM’s IPO confirms the big lie conclusively. At least with Iraq, we actually thought there were weapons of mass destruction. In the case of GM, no one in power really thought that millions of jobs were at stake. It was just a scare tactic designed to quell objections about the events that were to follow, events that totally corrupted the process and betrayed basic American principals.
The American taxpayers are into the GM bailout to the tune of about $50 Billion. That works out to $54 a share… so yesterday’s IPO at $33 represents a loss of around $21 a share to the American people. Obama decided to sell around 358.5 million, so our loss on this first liquidation comes in around $8.4 Billion. With a 40% beating, the American people are definitely in the loser’s column.
The previous GM shareholders lost everything. This represents a loss of another $2.4 Billion give or take. Of course, if the bankruptcy had been a normal one, they would have lost everything anyway so this is was to be expected.
The secured Bondholders got anything but what they expected according to their contractual rights. Indeed, they didn’t fare as well. Normally secured creditors occupy the first position of strength, When Obama intervened, he totally disregarded contract law, overturned long-established bankruptcy procedures and generally trashed free market principals as if he were a third world dictator. By rolay edict, he negated the bondholders’ contractual rights and using intimidation and threats, he bullied them into accepting predetermined settlements as if they were unsecured creditors.
In the end, their $27 Billion worth of bonds became part of the $35 Billion in “debt subject to compromise” on the Motors Liquidation balance sheet, where the only real asset is the corporations stake in the new GM. That stake, at the IPO, was worth around $8.7 Billion. Given that MLC has priority debts of around $2 Billion, with many more expenses yet to come, the bondholders are looking at an eventual outcome of around $.10 on the $1 for what once was their originally highly secured debt.
The United Auto Workers union, on the other hand, fared considerably better than either the American people or the secured bondholders. It’s important to remember here, that the primary cause for GM’s decline, bailout and bankruptcy was the crippling legacy costs contained within the union contracts and the union’s steadfast unwillingness to make meaningful concessions to allow GM to reorganize itself without bankruptcy. At every step, the unions would not bend thereby forcing GM to the brink of collapse and bankruptcy.
Remember too, that one of the principal outcomes of a traditional bankruptcies is that they allow a company to force concessions upon unions in order to get labor and legacy costs in line with reasonable business practices.
Not surprisingly, under the “new and improved” Obama brand of bankruptcy, the outcome was anything but traditional. I’m not sure if the UAW’s special deal was delivered by Santa Claus or by the Publisher’s Clearing House Prize Patrol but either would have been fitting. In the package, GM was relieved of $20 Billion it owned the UAW in legacy costs represented by the Retiree Medical Benefit Trust.
In return, the Trust got the following; $2.5 Billion note from the new GM to the Trust, $6.5 Billion worth of redeemable Preferred stock earning 9% interest. Both the note and the Preferred stock are as good as cash. In addition, they got a 17.5% stake in the new GM. That worked out to 262,500,000 shares. At $33 that totals $8,662,500,000. Added together, these become $17.663 Billion so far. In addition, VEBA also was issued warrants to purchase another 45.5 million shares of GM stock anytime between now and 2015 for $42.31 per share.
In the end, the UAW made only a token sacrifice, giving up a small portion of it’s retiree’s health care benefits while keeping 100% of it’s pensions as well as it’s pay for current workers. This kind of outcome is beyond a windfall when it comes to bankruptcy. It can only be seen as a gift from the messiah himself, Barack Obama, as payback for the tens of millions in campaign donations and support in the 2008 election.
The non-union salaried workers at Delphi, a recent spinoff of GM, didn’t fare nearly so well. Their pensions were transferred to the Federal Pension Benefit Guarantee Corp. (PBGC) and slashed by up to 70% percent, while the UAW contracts were being “topped off” by the administration.
The final score; the American people as shareholders and bondholders will lose around $45 – $50 billion along with the a proud history of integrity within the American business model. The UAW is out around 10% of it’s bloated legacy packages and in return gets a much more powerful seat at the GM table as a major shareholder.
So, in the end, like a third world dictator, Barack Obama nationalized one of this country’s largest companies based upon lies and misinformation and then trashed contract law, thereby destroying confidence in American businesses. He did this with one objective in mind, to protect the unions… the very group that drove the company into bankruptcy in the first place. The shareholders were wiped out, the bondholders gutted and the American taxpayers are taking losses of around 40% while the unions were made virtually whole.
I would expect this from Hugo Chavez or Fidel Castro but not my President… not my America.
Side notes: Another big winner in this IPO, more Obama friends, are the folks on Wall Street like Goldman, Sachs et al. By limiting the amount of IPO shares primarily to institutional investors and all but shutting out the individual investors, he was able to concentrate the $120 Million in commissions to amongst his friends. Interestingly, all the underwriters are the firms that benefited from the TARP bailout. Not a bad payday for another group that helped collapse the economy in the first place.
Finally, an ironic note and one that hasn’t been talked enough about. What’s being done about the obvious conflict of interest whereby the single largest shareholder, the US Government, also has absolute control over the agency that regulates market, the Securities and Exchange Commission? With the knowledge that any action the SEC might take against GM, in order to enforce the law, would negatively impact the value of it’s investment in the company… what are the chances of things being overlooked or glossed over? Already there are disclosures on file stating that financial statements can’t be relied upon. With the SEC already being one of the most incompetent regulatory agencies in government, this alone is enough to keep me away from investing in GM stock.
And what about the $7,500 taxpayer funded incentive to people who buy the Chevy Volt? How much more will we be expected to give GM before all is said and done?
History will look back at the whole GM bailout as one of America’s worse moments followed by one of America’s best. It will be seen as a moment when a narcissistic ideologue almost destroyed a nation from within by abusing the authority entrusted to him by over-reaching and forcing an injustice upon the people in order to provide favor to his supporters… only to have the people fight back to restore justice, freedom and American exceptionalism. God Bless the American people. Other nations riot when those in power abuse their trust, we just roll up our sleeves and fix things.
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