One of the major architects of the General Motors bankruptcy process, Harry Wilson, recently gave a very optimistic outlook for GM future share price. Mr. Wilson was a member of President Obama’s Auto Task Force, and was an instrumental player in seeing that UAW interests were put ahead of other creditors, like old GM bondholders.
Automotive News now reports that Mr. Wilson feels that GM may be a target for activists because of their “huge” cash hoard. According to the piece:
“Any company that isn’t efficient about capital allocation is a target for activists,” said Wilson, who is now a restructuring adviser at Maeva Group LLC in Westchester, N.Y. “GM has a huge cash hoard and they are generating lots more cash each year, so they need to be thoughtful about that.”
The problem with Mr. Wilson’s statement regarding GM’s balance sheet improving is that it just isn’t true. The fact that GM’s UAW VEBA (Voluntary Employees’ Beneficiary Association) still holds about 10% of GM’s outstanding shares (over $5.5 billion worth at current levels) may give reason to why it is now so important for cronies of GM and the Obama Administration to help elevate share price. A truer picture of GM’s balance sheet can be obtained through an analysis of past SEC filings which give a history of how much, if any, GM’s cash position is improving.
GM’s last quarterly filing, for period ending September 30, 2013, states that cash, cash equivalents and marketable securities total $28.6 billion. That seems like a fairly healthy amount, but bear in mind that GM received about $60 billion in cash from US and Canadian taxpayers during its “restructuring.” It is also important for automakers to keep a healthy amount of capital on hand to ride out downturns in the industry, as proven by Ford’s ablility to survive while GM had to be bailed out. Also, when viewed along with GM’s previous cash balances and debt picture, the numbers do not seem all that impressive.
For the period ending December 31, 2011, GM had $32.2 billion in cash, equivalents and marketable securities. For the period ending December 31, 2012, that figure shrank to $27.4 billion. What has grown a lot faster than GM’s cash, however, is the company’s debt.
GM started 2012 with $13.8 billion in short and long term debt. That figure grew to $15.9 billion at the start of 2013. The debt has now ballooned to $32.1 billion. This comes in spite of GM’s promises to remain debt free after having stiffed previous creditors through their first bankruptcy. While the news of GM’s current growing debt position should be viewed as a warning to investors, the media trumpets the news of “impressive” bond offerings.
Of course, the Obama Administration has a vested interest in having a perception of GM being financially strong. President Obama campaigned (and seems to be continuing to campaign) upon the “success” of the auto bailouts while he criticized Mitt Romney for wanting to let Detroit go bankrupt, something the city is currently in the process of doing. The President’s friends at the UAW came out in force to help him win reelection in return for the much-favored treatment they received in the Obama-orchestrated GM and Chrysler bankruptcy processes. It just so happens that the UAW is now the largest holder of GM shares after the US government’s exit.
The UAW VEBA trust was formed prior to the GM bankruptcy filing. The idea was that the UAW would take over responsibility for retirees’ benefits costs in return for a lump sum payment of $30 billion. Unfortunately, GM did not have the money. When the inevitable bankruptcy came, the outcome saw the VEBA trust financed with cash, preferred stock and common shares of “New” GM while other creditors, like bondholders, had their claims subordinated.
Here is where Mr. Wilson played his part. During the bankruptcy hearings, which were proceeding much faster than even the Treasury Department predicted, Mom and Pop GM bondholders asked for the process to be slowed down so that they could receive due process. Mr. Wilson testified for Treasury and said that the Obama Administration would remove their support and allow GM to be liquidated if the process was slowed down. The threat was taken seriously by the bankruptcy court and the bankruptcy settlement was pushed through as dictated by the Obama team.
Mr. Wilson’s union-friendly stance did not go unnoticed. The Teamsters’ Union later insisted upon Mr. Wilson being hired on at YRC Worldwide to help with their restructuring. Besides receiving advisory fees, he has since been appointed by the Teamsters to YRC Worldwide’s board and receives $250,000 a month, according to Teamsters for a Democratic Union.
Jumping back to GM’s UAW VEBA fund, the trust holds about $30 billion in assets and has recently benefited from the bull market. Expenses for benefits run about $2.5 billion per year. If taxpayers do not end up bailing out the UAW again, it is inevitable that the health care costs will rise for the fund. It is easy to calculate that the trust will have to earn about 10% a year on its assets to stay solvent. Even with a short term gain on GM holdings, it is unlikely that the fund will be able to survive without renegotiations with GM during the next UAW contract negotiations.
The original VEBA agreement helped US automakers lower ongoing UAW legacy costs. These savings kicked in at the beginning of 2010 and is one of the primary reasons that Ford and GM are doing so much better than they were pre-bailout. The other primary reason is that auto sales have rebounded from recessionary lows. Despite assertions by cronies of the Obama Administration that GM and the auto industry have been saved by the President and it is now all clear sailing, there is much evidence to suggest that the “success” may be temporary.
Mark Modica is an NLPC Associate Fellow.