Auto Bailout Legacy: GM's European Nightmare
Three years into their forced marriage with GM, the American taxpayers have seen the value of their investment in GM deteriorate by approximately $24 billion, largely due to continuing European losses. Exposure in Europe has contributed to crushing the value of GM's stock due to its chaotic and failing Opel unit in Germany. While government, journalists and Wall Street sympathizers have given the Obama Administration and GM leadership an almost incomprehensible pass on this value destruction and massive loss (presumably due to the macro-economic nature of the crisis), it's time to call for the accountability that this new Board was supposedly going to deliver.
Overlooked is that the value-destroying, cash-sucking disaster that is GM Europe was packaged and ready for sale to new European buyers in 2009 before the new Obama GM Board of Directors slammed the brakes on the deal, throwing GM into its current value free-fall. In fact, the decision to not sell the Opel operations (which has not been profitable for more than a decade) in 2009 after GM cleared bankruptcy was the very first major decision of the new Obama Board. Had Opel been sold, GM stock would be much higher than it is today.
In November of 2009, the governments of Russia, Germany and the US were engaged in a major international deal that would have seen the global auto parts manufacturer Magna purchasing a majority portion of GM's failing Opel unit through a combination of public and private funding coming from Russia and Germany. Then interim GM CEO Fritz Henderson made the controversial decision to simply sell the unit off. The cost of fixing Opel and ridding the company of the over-capacity was a task that would cost into the tens of billions of dollars, if it were possible at all due to the legal and political obstacles in the way.
But the "new and improved" Obama Board of Directors, working mostly at the persistent lobbying and urging of the UAW's appointee, Steve Girsky (in photo), were naively convinced that Opel was simply a rough jewel in need of some new leadership (Opel fired its third leader in as many years a few weeks ago) and TLC from the brain-trust in Detroit. With his persuasive lobbying, the union's man Girsky convinced all but two of the Board members to vote to ditch the planned sale and hold onto this "gem" that has now contributed to the loss of about $24 billion of the American taxpayers' forced investment. Beyond the sheer magnitude of the value losses, fixing Europe has become an all-consuming distraction that is draining GM of vital and scarce resources.
This became evident on last quarter's earnings conference call, where CFO Dan Amman ducked and weaved in answering how much of the American taxpayers' money was being lent to Opel to sustain its failing operations. And as if the misdeeds and mistakes couldn't get worse, GM tied itself up in an equity alliance with the only other automaker in the region in as bad or worse shape than Opel, Peugeot. GM just made the shocking admission with an SEC filing that it will likely have to write-down the investment as a loss since Peugeot's stock price has also fallen off a cliff with little or no hope of recovery. How's that new and improved government leadership and accountability working for you now?
Another of the GM Board's major decisions around the time that they were blowing the sale of Opel was to oust Henderson from his position. Ironically, the move may have been based on Henderson's desire to dump Opel. From a Businessweek article from that period:
One long-time GM executive told me that Henderson wanted to sell GM's long-suffering Opel unit in Europe. He thought Opel's cash drain and problems will be too much of a distraction for GM at a time when it is trying to repair the U.S. business and mind its growing overseas operations. But the board, led by Girsky, Bonderman and Ackerman, wanted to keep it. They figured that selling it off would leave GM weak in a big market like Europe. Plus, the board was dismayed that Henderson didn't get more than the $750 million that parts maker Magna was going to pay for a majority stake in Opel.
All of this leads one to ask the obvious question, "What would the American taxpayer investment look like if GM wasn't as exposed in Europe, as would have been the plan had the new enlightened government and union-sponsored Board of Directors not intervened?" While any such answer would be speculative, it is obvious that the company would be in a much stronger position today. While pundits point to a weak environment in the auto sector as a reason for GM's poor stock performance, a comparison of GM to other major players in the field reveal how poorly the Obama-appointed leadership has performed and give an indication of how much stronger GM would have been if not saddled with its European anchor around its neck.
Since GM's IPO almost two years ago, the broader S&P 500 has gone up about 30%. During that period, Ford shares have gone down about 15%, Toyota up about 15%, Honda up about 5%, Nissan up about 35%, Hyundai up about 60% and Volkswagen up about 85%. Make no mistake; GM is vastly underperforming the industry, despite an influx of approximately $50 billion of taxpayer funds. In addition to US taxpayers anteing up, Canada put in over $10 billion and GM was relieved of about $28 billion of bondholder obligations as UAW claims were protected. That's an improvement of almost $90 billion to the balance sheet and the company still lags the competition!
GM's performance is an embarrassment to its Obama-appointed leadership and an indication that the Administration has not fixed the underlying problems there. Worse yet, when a possible solution to one of the biggest overhangs, GM Europe, was on the table, the new leadership nixed the deal. And now an unstable management team, which seems to be constantly reshuffling as it tries to find direction, does not inspire confidence. Unfortunately for the taxpayers, it appears the damage is done and the ability to pull out a recovery is all but passed. There is no reason to continue the market-timing gamble that sees taxpayer money risked on a company that should be allowed to sink or swim on its own, without government input. It's time to simply cut the losses and dump taxpayers' remaining stock and end this failed experiment once and for all.
Mark Modica is an NLPC Associate Fellow.