Government is playing deal or no deal, but there's no prize for the contestants

The U.S. government has delivered an ultimatum to GM's bondholders and the unions -- accept its terms or deal with a bankruptcy, which will likely be filed June 1.  Nobody questions that these parties got themselves in this mess -- the auto companies for failing to follow supply and demand, the unions for expecting exorbitant terms in bad times, and the bondholders for reaping interest while there food source slowly died.

And the government has made a strong case that it has to save GM and Chrysler, in some form.  A liquidation or long halt in production could cause several teetering suppliers to fall into bankruptcy and closure, destroying the entire U.S. auto industry, by making even the more successful companies like Toyota and Volkswagen unable to sustain production.  This in turn could very well plunge the U.S. from a recession into a depression.

However, more alarming than this precarious situation is the way the government is mismanaging it and disenfranchising many parties in the process. 

Under the current deal, Unions would receive approximately a 20 percent stake in GM, to satisfy their pension and health care requirements.  I'm not going to argue the merits of that.  It’s sufficient to leave the debate on unions and retirement benefits to the readers.

However, what stands out glaringly is this -- the U.S. government is demanding a 70 percent stake in the company, while it is demanding that at least 90 percent of bondholders exchange their debt for a stock stake equaling 10 percent. 

So what's the key problem?  The government so far has only loaned GM $19.4B USD, though it says the recovery will require "tens of billions" more.  Meanwhile the bondholders hold $27B USD in GM debt.  So the government may, in the end, loan GM slightly more than bondholders (say $40B USD total, appr. 50 percent more), but is asking for a whopping seven fold equity stake?  It’s little wonder the bond holders have rejected the proposal!

Equally strange is the bipolar nature of the government's decisions -- the U.S. Treasury Department recently indicated its willingness to forgive all of Chrysler's debt, which is will likely be in the tens of billions as well.

Meanwhile, as a GM bankruptcy becomes an increasing certainty, the company's stockholders, many of whom are small-time investors, risk losing their nest eggs due to this game of hard ball they never signed up for.

And last, but not least there's the troubling question of the future of GM, with the government taking on majority ownership.  While mild socialism has had mixed, even slightly positive results in Europe, this is a precedent setting move -- the U.S. government is preparing to take majority ownership of one of the country's largest manufacturers.  All the while, banks and financial institutions, with the exception of Fannie Mae and Freddie Mac, are largely left to do what they please, largely unfettered.  This strange mixture of selective nationalization and laissez-faire economics seems haphazard, unbalanced, psychotic, and doomed to failure.

An important distinction is that this is not a red and blue political issue -- this precedent started with Bush administration (Republican) and has continued into the Obama administration.  The push to move Chrysler and GM into bankruptcy and either take a stake in the company (GM) or forgive the taxpayer-fund loan (Chrysler) have enjoyed bipartisan support.  Only a few fiscally conservative Democrats and Republicans have voiced dissent.

And let's face it; both GM and Chrysler are the equivalents of a car crash victim on life support.  The medical services team at the hospital is the U.S. government and they've kept the companies on life support, a wise decision, assuming we don't want them to die.  However, now they're demanding a huge payment for a treatment (deal), or alternatively giving a life-threatening surgery (bankruptcy) while taking such a payment regardless.  Meanwhile the family members (bondholders, stockholders, and retirees) suffer as they find themselves on the wrong side of unfavorable financial terms, or face the death of their loved one who has supported them.

These are dire times, with few easy answers.  However, the U.S. was founded on the principles of equity and capitalism.  In the despair of this recession, one can only hope that government has a change of heart and does not lose sight of these principles, as it currently is doing

"So, I think the same thing of the music industry. They can't say that they're losing money, you know what I'm saying. They just probably don't have the same surplus that they had." -- Wu-Tang Clan founder RZA

Copyright 2017 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki