In the coming weeks we are sure to hear a lot of hype over the upcoming General Motors IPO. As we approach the November elections, it is a certainty that the Obama administration will tout the government intervention and nationalization of a major US industrial corporation as a huge success. Claims have already been made that the American economy and millions of jobs have been saved by bailing out GM. There are many people, including the Mom and Pop investors that financed GM through their bond purchases, who see a less savory side to the bankruptcy process and view it as a model of corruption and cronyism.
Let’s review the sordid history of the GM bailout. Well before the time of the bankruptcy filing, the executive branch of the US government unilaterally took it upon itself to bail out and restructure the American auto industry. Decisions and funding were made without congressional approval. The US Treasury Department formed the Auto Task Force with the stated goal of restructuring GM and Chrysler outside of bankruptcy. The Task Force was headed by Steven Rattner (in photo), a hedge fund guy whose past is tainted by allegations of being involved in a “pay to play” scheme when he ran the Quadrangle Group. At the same time that the public, investors and creditors were deceived into believing that the goal of the Task Force was to avoid bankruptcy, millions of taxpayer dollars were being spent on bankruptcy attorneys and advisers. With these types of advisers, is it any surprise that the advice given was to file for bankruptcy? This brings into question why the primary advice wasn’t sought from auto industry experts rather than bankruptcy experts if the goal was truly to restructure successfully outside of bankruptcy.
The deception in the GM process continued as more taxpayer money was wasted when the Auto Task Force orchestrated a bogus offer to GM bondholders that was designed to fail. Documents were filed and mailed offering bondholders 10% of GM equity in exchange for their $27 billion of debt. Assurance that this offer had no chance of succeeding was guaranteed by a stipulation that required at least 90% bondholder approval. When the desired result of bondholder rejection was received, the Task Force proceeded to devise a bankruptcy plan that would favor the politically powerful labor unions.
The breakdown of the deal that was put together is as follows; the UAW receives 17.5% equity in New GM, $6.5 billion of preferred stock and $2.5 billion cash in exchange for $20 billion owed to its benefits trust. The US government receives about 61% equity for providing $50 billion of financing. The group with the least political clout, the GM bondholders, will receive just 10% equity and some warrants in exchange for $27 billion of debt. Approximately one third of what the UAW gets! To add insult to injury, bondholders have their equity held along with other liabilities of Old GM, AKA Motors Liquidation Company. Ignoring over 200 years of contract law that placed bondholders on equal ground to the UAW as creditors, a precedent was set for favoring one set of creditors (such as political donors) over another as dictated by the executive branch of the US government.
The precedents set in the GM bankruptcy were recently commented on by Al Koch, the head of Motors Liquidation Company, when he boasted about the “new and unique template” that can be used in future bankruptcies. At this point it might be wise to give further consideration to these precedents and ask ourselves how we as a nation want to proceed in the future.
Should any entity be allowed to create favored classes of creditors in a bankruptcy proceeding? Regarding GM specifically, was there really systemic risk to the entire economy if an alternative plan for GM was carried out? Why wasn’t a conventional plan of reorganization considered? If the goal of government intervention was to save jobs, why were only union jobs protected while non-union jobs were sacrificed as Treasury demanded 2,600 dealerships close in a move later criticized by a government watchdog agency? And lastly, can the problems of a failed corporation beset by years of mismanagement, missteps and huge UAW liabilities be that easily washed away by a “quick rinse” bankruptcy? The future should provide the answer to this last question.
Mark Modica is an NLPC Associate Fellow and a spokesman for Main Street Bondholders.
GM’s Stagemanaged IPO (Investor’s Business Daily)