Welcome to the Obama Motor Company

[Hansmeister]

From WSJ:

Gettelfinger Motors
The mauling of GM's bondholders reveals Treasury's political hand..

President Obama insisted at his press conference last night that he doesn't want to nationalize the auto industry (or the banks, or the mortgage market, or . . .). But if that's true, why has he proposed a restructuring plan for General Motors that leaves the government with a majority stake in the car maker?

The feds have decided they should own a neat 50% of GM, yet that is not the natural outcome of the $16.2 billion that the Treasury has so far lent to the company. Nor is the 40% ownership of GM that the plan awards to the United Auto Workers a natural result of the company's obligations to the union.

Yet Secretary Timothy Geithner and his auto task force, led by Steven Rattner, have somehow decided that Treasury and UAW chief Ron Gettelfinger will get to own a combined 90% of GM. If there's a reason other than the political symbiosis among the Obama Administration, Michigan Democrats and the auto union, it's hard to discern. From now on let's call it Gettelfinger Motors, or perhaps simply the Obama Motor Company, though in the latter they'd have to change the nameplates.

The biggest losers here are GM's bondholders. According the Treasury-GM debt-for-equity swap announced Monday, GM has $27.2 billion in unsecured bonds owned by the public. These are owned by mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers. Under Monday's offer, they would exchange their $27.2 billion in bonds for 10% of the stock of the restructured GM. This could amount to less than five cents on the dollar.

The Treasury, which is owed $16.2 billion, would receive 50% of the stock and $8.1 billion in debt -- as much as 87 cents on the dollar. The union's retiree health-care benefit trust would receive half of the $20 billion it is owed in stock, giving it 40% ownership of GM, plus another $10 billion in cash over time. That's worth about 76 cents on the dollar, according to some estimates.

In a genuine Chapter 11 bankruptcy, these three groups of creditors would all be similarly situated -- because all three are, for the most part, unsecured creditors of GM. And yet according to the formula presented Monday, those with the largest claim -- the bondholders -- get the smallest piece of the restructured company by a huge margin.

This seems to be by political design. GM CEO Fritz Henderson says Treasury insisted that bondholders receive, at most, 10% of the company. "We went to the maximum and offered 10%," Mr. Henderson said. Mr. Rattner's office did not return our calls, so we can't say why Mr. Rattner wanted private risk capital cut out of the ownership of the new GM, but no one has contradicted Mr. Henderson.

Some Treasury officials have told the media that 50% government ownership is important to ensure that taxpayers get repaid for the $16.2 billion in Treasury loans. But this is false logic. Taxpayer-shareholders are likely to be far better off with a smaller stake in a truly private company that is better insulated from political meddling. Private owners are more likely than the Treasury or the unions to try to run the company for profit, and so increase its equity value over time. Treasury says it would be a hands-off owner, but that hardly seems plausible and in any case that would merely leave the UAW in control. At the next labor contract bargaining session, the union would sit on both sides of the table.

GM, the government and the bondholders all insist that a bankruptcy filing would be a disaster. GM's SEC filing on the debt-equity swap also warns darkly that if the requisite 90% of bondholders don't agree to these terms, they may recover little or nothing in bankruptcy court. But given the choice between a 10% stake in Gettelfinger Motors and the independent mercies of a bankruptcy judge, bondholders could be forgiven for taking their chances in court.

Certainly the bondholders deserve to take a haircut like everybody else. But squeezing them in such a blatant fashion has other consequences. Who would be crazy enough to lend GM money in the future? The Treasury also says it wants banks that do poorly in its "stress tests" to try to raise private capital before putting in more public money. The mauling of GM creditors tells investors not to invest in TARP banks because everything this Treasury touches turns to politics.

Monday's offer is so devoid of economic logic or fairness that it confirms the fears of those who said the original bailout would lead to a nationalized GM run for political ends. This fiasco will in part go down on George W. Bush's copybook, since he first decided GM was too big to fail.

But rather than use his early popularity to force hard decisions through the bankruptcy code, President Obama has decided in essence to have the feds run GM and Chrysler. This inevitably means running them for the benefit of the UAW that is so closely tied to the Democratic Party. Next up will be tax changes and regulations intended to coax, or coerce, Americans to buy Gettelfinger Motors cars. This tale of taxpayer woe is only beginning.

We're turning into Venezuela.

[Queequeg]

 

What'd you think about Obama giving Chavez that hanjob, Hans?  Or stopping all those friendly CIA sadists from torturing prisoners to death? 

[Neil]

What'd you think about Obama giving Chavez that hanjob, Hans?  Or stopping all those friendly CIA sadists from torturing prisoners to death?

You're just happy because Mr. Corrupt is from your hometown.

[Queequeg]

What'd you think about Obama giving Chavez that hanjob, Hans?  Or stopping all those friendly CIA sadists from torturing prisoners to death?

You're just happy because Mr. Corrupt is from your hometown.

My home neighborhood.   

[Faeelin]

Heh. Since TARP is essentially a subsidy to the financial industry at the expense of the American Taxpayer, that may not be the best example to bring up here.

Although if this is true, then it a bit ominous.

[Admiral Yi]

Heh. Since TARP is essentially a subsidy to the financial industry at the expense of the American Taxpayer, that may not be the best example to bring up here.

The difference being if the financial industry disappears we all go to eating bark and wearing leaves.  If GM disappears there's a bunch of unemployed people and we drive Toyotas instead.

[Alatriste]

Heh. Since TARP is essentially a subsidy to the financial industry at the expense of the American Taxpayer, that may not be the best example to bring up here.

The difference being if the financial industry disappears we all go to eating bark and wearing leaves.  If GM disappears there's a bunch of unemployed people and we drive Toyotas instead.

And exactly why driving Toyotas is all right but getting your loans from Banco de Santander, Deutsche Bank or Mitsubishi Financial isn't? I wonder why so many analysis equals letting some Americans big banks die with the disappearance of financial industry all over the world.

Letting those banks fall would be a hard blow for the economy on a global scale, true, but letting GM and Chrysler declare bankruptcy wouldn't be painless...

This said, Hans is as clueless as ever if he really thinks Chavez would help industrial firms in problems with taxpayer money. The mere idea is ridiculous, for him such a thing would be capitalist and evil... he would nationalize them at a stroke! And probably wouldn't see why the state should pay any indemnization.

[Admiral Yi]

And exactly why driving Toyotas is all right but getting your loans from Banco de Santander, Deutsche Bank or Mitsubishi Financial isn't? I wonder why so many analysis equals letting some Americans big banks die with the disappearance of financial industry all over the world.

If there were a way to let the big American banks fail but have the others survive then it wouldn't be an issue (or at least less of an issue).  The danger is posed by the credit extended by Banco de Santander et al to Big American Bank.  Big American Bank's failure then blows up Santander's balance sheet, which then blows up Mitsubishi's balance sheet, and so on and so forth.

[Alatriste]

And exactly why driving Toyotas is all right but getting your loans from Banco de Santander, Deutsche Bank or Mitsubishi Financial isn't? I wonder why so many analysis equals letting some Americans big banks die with the disappearance of financial industry all over the world.

If there were a way to let the big American banks fail but have the others survive then it wouldn't be an issue (or at least less of an issue).  The danger is posed by the credit extended by Banco de Santander et al to Big American Bank.  Big American Bank's failure then blows up Santander's balance sheet, which then blows up Mitsubishi's balance sheet, and so on and so forth.

That's true, but my position is (and I wasn't clear enough) that the collapse of GM and Chrysler would also mean a risk of systemic failure or chain reaction in the economy, both due to the number of jobs lost and the debt they have accumulated, often with the very same banks that are in danger.

[Razgovory]

So how many of these are you going to put out?

[Caliga]

My home neighborhood.   

You're poor.

[Ed Anger]

Chicago Sucks, Byzantium sucks, Persia sucks and Armenia sucks.

[Grey Fox]

Obama

[Caliga]

Chicago Sucks, Byzantium sucks, Persia sucks and Armenia sucks.

                                                 

Also, Turkey rocks.

[Neil]

And exactly why driving Toyotas is all right but getting your loans from Banco de Santander, Deutsche Bank or Mitsubishi Financial isn't? I wonder why so many analysis equals letting some Americans big banks die with the disappearance of financial industry all over the world.

Well, if the US government hadn't bailed out AIG, none of those banks would be in business.