The term “wealth redistribution” has been used by political pundits on the right who accuse Democrats of having a misguided agenda wherein the wealthiest Americans will be able to subsidize a government spending spree in order to redistribute wealth to the less affluent populace. General Motors, through its reorganization plan, has contrived its own version of wealth redistribution. This action was orchestrated by the Obama Administration as it took control of the GM bankruptcy process. Old GM shareholders and bondholders, along with taxpayers, lose out as new wealth is created for bankruptcy attorneys and advisers, investment banks and the politically connected UAW.
During the bottom of the latest economic cycle, auto industry sales plummeted far below normal levels. President Obama recently explained that Ford was able to ride out this rough patch by borrowing $23 billion to shore up their balance sheet prior to the downturn. For a short (and temporary) period both General Motors and Ford had a cash burn rate of billions of dollars per quarter. One and a half years later Ford and GM are both reporting quarterly profits in the $2 billion range. The beneficiaries of GM’s profits, however, are not the people who owned and financed them during the economic downturn.
A review of General Motors’ restructuring reveals contract law subversion as some creditors were favored over others during an unprecedented nationalization of a major US industrial corporation. Whereas bondholders should have had equal standing to other unsecured claims, such as the UAW’s, this was not the case as bondholder rights were subordinated. The questions that arise are, were the extreme actions of the Obama Administration necessary for the survival of GM? If, as admitted by President Obama, Ford’s ability to survive the downturn was its additional liquidity, why couldn’t less drastic measures been utilized to help GM ride out the cycle? Is it really feasible that government intervention of this extend is the primary reason GM now reports that it is making billions of dollars when Ford is accomplishing the same feat, or is it more likely the result of industry and economic cycles along with some logical managerial decisions? As the saying goes, “follow the money” to ascertain why such invasive government actions may have occurred.
During the General Motors’ restructuring process, the government’s Auto Task Force claimed that a turnaround was not possible without drastic debt reduction. This claim can be contested based on Ford’s success. It also seems that the debt reduction was only a requirement if the sacrifice came solely from bondholders as new debt in the form of $6.5 billion of preferred shares paying 9% was given to the UAW. It was not so much the debt that mattered as much as it was the government’s desire to control who would be allowed to benefit from the debt. In fact, GM maintained liability for $27 billion of under-funded UAW pension obligations after the reorganization! This same philosophy played out as UAW jobs were deemed important enough to save while non-union jobs were sacrificed when the Task Force demanded that 2,600 dealerships be closed.
More hypocrisy can be found in the Administration’s handling of GM’s restructuring regarding the proposed need to protect taxpayer money. In an egregious example of corporate welfare, GM has been granted a $45 billion tax benefit giving them minimal tax responsibility for the next 20 years. There is also a planned $7,500 federal tax credit to help subsidize Chevy Volt sales. When taxpayer costs are publicized, these figures are conveniently left out. Also excluded is the money supplied to GM by our government prior to 2009 and the funds given to Ally Financial, previously GMAC.
The main beneficiaries of the GM wealth redistribution to this point have been the bankruptcy attorneys and advisers. It is estimated that the legal bill for the GM reorganization will be approximately $1 billion. Along with the UAW, the lawyers seem to be benefiting from a cozy relationship with Washington. Investment bankers will also get a cut of the wealth as the GM IPO hits the market.
The last group that has the opportunity to get a piece of the GM pie is the new investors in GM stock. It is questionable as to whether they will fare as well, considering GM has warned that their accounting may not be reliable. This group will have little legal recourse if they invest based on misrepresented figures since the GM IPO is exempt from federal anti-fraud laws. Based upon GM’s and our government’s previous treatment of GM shareholders, who receive nothing, the new group of GM potential investors may want to consider carefully before making the plunge.
GM’s Stagemanaged IPO (Investor’s Business Daily)