General Motors Over-Hyped Pension Move Doesn’t Help Liability Problem
It's time, once again, to clarify a major misrepresentation by General Motors and the media. That is the implication that the recently announced move to modify a portion of non-union pensions will result in an improvement of $26 billion to GM's pension shortfall. GM shares are down about 5% since the announcement, bringing into question the accuracy of the rosy projections.
A Bloomberg Businessweek report notes Moody's Senior Vice President Bruce Clark's opinion that "When all is said and done, the company's total underfunded pension liability will be reduced by only $1 billion." Also noted is that GM will pump about $4 billion into the pension fund to achieve this reduction. Government Motors' underfunded obligations will go to about $24 billion but is still headed in the wrong direction. The shortfall was less than $21 billion a year ago.
Another important fact overlooked by the "journalists" that cover GM is that the figure would be a lot worse if the company didn't get a suspiciously high 11% return on pension assets in 2011. How did the company manage to get such gains while the main portion of pension assets were invested in fixed income securities? I'm guessing that these types of returns can only come from risky trades or friends in high places.
The misrepresentations by Government Motors are to the extreme that I can only describe the constant stretching of truth as outright lies. If you believe that GM now has magically improved its pension problem by $26 billion, perhaps you also believed that the Chevy Volt was selling like hotcakes as demand exceeded supply or that taxpayers had been repaid in full. The company's stock performance reflects the lack of credibility that GM management has.
What bothers me the most is that the misrepresentations are only going to hurt smaller retail investors. The guys that control the big money are not so easily fooled. I doubt that many money managers believe dubious claims by the media that GM is so cash rich that they may buy back Treasury's GM stake. GM Financial just announced a $1.2 billion debt offering and GM previously issued $2 billion of new shares to help fund underfunded pensions in a move that went unreported by most of the media. Does that sound like a company with a "fortress" balance sheet? GM share performance suggests otherwise.
When Obama-friendly Warren Buffett's Berkshire Hathaway group bought into GM, one had to wonder if the move was designed to help the Administration as it campaigns on the "success" of GM more than it was designed to help Berkshire Hathaway shareholders; especially when most of the "smart" money seems to steer clear of GM's shares. Once again, the move seemed to fool some retail investors at the time, as shares temporarily rose on the news. The move was short-lived and shares have resumed the downward trend.
Retail investors should be very skeptical of reports that appear overly positive on GM. There are many articles written by seemingly unbiased analysts, like reports from a source called Trefis Team, that are only opinions of individuals that seem to want readers to risk their money on GM. That same bias comes from ex-Car Czar, Steve Rattner, as he is presented as a "Market Master" on Government Motors-friendly networks, when he implies that GM shares have no where to go but up.
The credibility of those that give opinions on GM can be judged by the past accuracy of the hype. Pumpers of GM, like those mentioned above, had called for GM shares to go to around $50 shortly after GM's IPO at $33 a share. If you had listened to the so-called experts and purchased GM shares, you would have seen your investment fall by over a third. The many that did listen were smaller investors who believed the hype which neglected to mention the risks.
The Obama Administration also had an opportunity to sell Treasury's taxpayer-funded stake in GM when the shares were over $30. The politically-based decision to hold GM shares and gamble taxpayer money has been costly. Taxpayers' GM stake has decreased in value by about $5 billion since the time that Treasury could have begun selling its holdings.
The Government Motors' saga continues and is sure to get much coverage as November elections near. Those following the story should be aware of the inaccuracies of past representations. Also be aware that many that are doing the reporting are receiving billions of dollars in ad revenue from GM. At the least, retail investors should proceed with caution if they are considering putting their money into GM based on information reported by questionable sources that has proven to be less than reliable up to this point.
Mark Modica is an NLPC Associate Fellow.
Update: GM shares are hitting lows of the year today (6/25/12) and trading at $20.