Government Motors Coming Soon

Government Motors Coming Soon

Kurt Brouwer

Couldn’t resist posting this gorgeous photo of a classic 1958 Corvette. Too bad General Motors no longer has the sense of style and adventure and risk-taking embodied in the release of the Corvette line of cars.

Source: Wikipedia Commons / GNU

Here is a quick roundup on the sad tale and likely demise of GM [emphasis added below]. This Bloomberg piece implies that bankruptcy is a done deal and that it’s coming soon:

General Motors Corp., the world’s largest automaker until its 77-year reign ended in 2008, plans to file for bankruptcy protection on June 1 and sell most of its assets to a new company, people familiar with the matter said.

The U.S. Treasury will provide financing while the asset sale is arranged to a company formed by the government, GM said in a regulatory filing. GM’s path will be smoothed by an agreement today with some of its biggest bondholders on terms for an equity stake in the reorganized automaker.

GM, which would follow Chrysler LLC into bankruptcy, plans to build its new business around assets such as the Cadillac and Chevrolet brands. The 100-year-old automaker, battered by tumbling sales, fell short in a bid to cut debt by $44 billion by the U.S.-set June 1 deadline to restructure outside court…

The Chevy brand is doing OK, particularly the Silverado pickup trucks segment. But Cadillac sales are terrible.

U.S. Treasury to own 72.5% of GM

A second Bloomberg piece reports that some bondholders have accepted a slightly-sweetened offer. No doubt they were influenced by the attack on Chrysler’s bondholders by the administration’s car czar, Steven Rattner, and others.

General Motors Corp. and the U.S. Treasury reached an agreement with some of the automaker’s largest bondholders to smooth the way through bankruptcy.

GM, contemplating a sale of its assets to a new company through bankruptcy, would give 10 percent of its equity to the old GM to pay bondholders and other creditors and issue warrants for as much as 15 percent more, the Detroit-based automaker said in a U.S. regulatory filing today.

GM is trying to restructure debt and labor agreements before it files for bankruptcy protection June 1, according to people familiar with the matter. Advisers to the bondholders, representing 20 percent of the $27.2 billion in principal, support the terms of the plan, GM said in the filing. The Treasury is requiring an unspecified percentage of bondholders agree to the terms by 5 p.m. New York time on May 30, GM said.

…Treasury would get 72.5 percent of GM’s equity and 17.5 percent would go to a union health trust under the plan, the automaker said. Bondholders were previously offered a 10 percent stake…

However, other publications report that the bondholders have rejected the GM offer. A bit confusing at this point, but the outcome is pretty clear to me. The majority owner of GM will be the government with the United Auto Workers union at the number two spot.

With the pending bankruptcy or rescue of GM, the U.S. government’s tab for the equity stake will be very high as this post from the Wall Street Journal’s Deal Book blog indicates:

…Consider this extraordinary fact: The U.S. government is likely putting up to $50 billion in new money to back the company’s bankruptcy reorganization, according to people familiar with the plan.

…It’s clear that a large portion of this amount will be secured with the equity of the “new GM.” Why is the government likely to get equity and not, say, debt with interest and a repayment schedule? Because too much debt would apparently make the company unviable. It’s as if the government has devised an SAT exam for GM, and is blatantly funneling the company the answers.

Okay, fine. So what will this equity be worth?

That’s anyone’s guess. By the logic of some of the people who know the company best – its own unionized workforce – the bet is that it won’t be worth much.

Remember that the union just agreed to take a relatively small portion of its health-care trust in GM equity. The rest will be funded via annual payments on preferred stock. In other words, UAW’s view of the future is clear: Cash today over equity value tomorrow…

That raises the final question, which is, should we let GM fail? I don’t mean a government-enforced bankruptcy filing a la Chrysler, I mean just let it go. The immediate response for many would be, what about all those lost jobs? Let’s deal with the question of jobs and just put the cost of saving them into an economic or financial context. What are those jobs worth?

Here’s an analysis from the auto web site AutoSpies.com that quantifies how much we are spending per job:

…If you look at Fortune Magazines Top 500 for 2008 you will find that GM employes 266,000 employees. Certainly that figure is lower in 2009, but if you apply that number and divide it into the conservative projection of $70 Billion invested to get GM through bankruptcy. The figure you get is over $263,000 per job saved at GM. Now that assumes that none of these 266,000 jobless won’t find a job and will be considered unemployable. In reality almost all of these people will find other sources of income either at a competitor or somewhere else in the economy.

Whatever happened to the notion that if one company failed the market would fill in the gaps? You can argue that GM is too big to fail, but logic dictates that the market void will be filled by the survivors and they will benefits from GM’s missteps. Capitalism is self healing so to speak.

So I guess as we get to the bottom of the barrel we have to ask ourselves two questions.

1. Should we pay over a quarter of a million dollars per employee to save a sinking ship?
2. Would these same employees spend a quarter of a million dollars to save my job?

It is all in how you look at it, I say cut our losses and let the system correct itself.

Excellent point and it’s one we made earlier (see Should We Let GM Fail?).

There are already signs that competitors and others are interested in some of GM’s assets. For example, the well-known former racer and automotive entrepreneur Roger Penske has expressed interest in GM’s Saturn line of cars. GM’s Opel line of vehicles has a couple of suitors. And, I’m sure some car company would want some of the other lines such as Chevy Silverado trucks.

So, let’s consider an alternative to Government Motors. How about we let GM go into an expedited bankruptcy without a government bailout and without cramming down the bondholders? We also allow competitors to bid on various GM divisions.

Once the dust settles, if any employee groups are left without work, we just buy them a $250,000 annuity. The result would almost certainly be cheaper for taxpayers and better for employees and the economy.

Update:

I should have thought of this — government-backed loans for car dealers. After all, when you are bailing out banks and car companies and all, what about car dealers? This announcement from the National Automobile Dealers Association should not come as a surprise [emphasis added]:

…After a number of meetings between the National Automobile Dealers Association and the Obama administration in which NADA urged for greater access to floorplan loans, the Small Business Administration announced today it’s launching a pilot program that will—for the first time—provide eligible dealers with government-backed lines of credit to finance their vehicle inventory.

NADA praised the SBA for its efforts to expand its 7(a) loan guarantee program to include wholesale inventory also known as floorplan loans, since many auto dealers are currently struggling to survive without access to credit to purchase vehicles for their lots. The pilot program begins July 1, 2009 and runs through Sept. 30, 2010, at which time SBA will consider extending the program…

I’d be willing to be a fair amount that the program will be extended. After all, once given, Federal largess is hard to take back.