Marketplace Scratch Pad

GM boggles the mind

Scott Jagow May 27, 2009

It’s hard to comprehend what’s happening with this car company. I don’t know what’s going on behind closed doors, but to the public, the outcome of this bankruptcy appears ominous: Soon, the government will be the controlling stakeholder in GM. The UAW isn’t signaling much faith in the company’s future value. And the bondholders who kept the company alive are getting fleeced.

The Wall Street Journal reports that the government is likely putting up to $50 billion in new money to support GM’s bankrutpcy. That means taxpayers are getting a much bigger chunk, when the UAW is agreeing to a smaller stake (17.5% instead of 39%). From the Journal:

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.

As for bondholders, they’ve rejected the government’s offer of a 10% stake. You might read GM Bondholders Are People Like You and Me, also from the Journal:

First, let’s set the record straight about who owns GM’s bonds. We are hardworking families, individual investors and retirees who purchased billions of these bonds in $25, $50 and $100 increments. Many bonds were bought directly and others are held in our pension funds, 401(k) plans and other retirement programs.

We are not an unreasonable group. We understand that to save GM everyone will need to endure economic pain. But we are very troubled by the government’s decision to give UAW retirees — equal members, with the bondholders, of the unsecured creditor class — preferential treatment. The government cannot be permitted to rewrite bankruptcy rules on a whim to selectively benefit equal groups.

Why would these private investors ever put their money into a company like GM again? I don’t blame them for rejecting the government’s puny offer, but I’m not sure they’re going to get a better deal in bankruptcy. Yeah, it’s supposedly up to a bankruptcy judge, but this is looking like a “government-managed” bankruptcy where the pieces are already in place. GM, and by that I mean Government Motors, wants to have this thing wrapped up within a month.

Hopefully, the bankruptcy judge will put the company through its paces, instead of letting the government dictate the terms. But my confidence level isn’t very high.

The government obviously believes it can turn GM around through this reorganization. Maybe it can. Maybe that equity stake will be a huge windfall for taxpayers down the road.

But what do you think will happen?

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