"Is What's Good for GM Good for the Country?"

Sydney M. Williams

Thought of the Day

“Is What’s Good for GM Good for the Country?”

November 19, 2010

Two years ago the country was in a funk, to put it mildly. The banking system had come frightening close to melting down in September-October of 2008. While credit markets were beginning to recover, we were facing a very severe recession. On the other hand, a whiff of spring was in the early winter air with an unpopular president being replaced by one for whom people had very high expectations.

Over the years leading up to the end of the first decade of the 21st Century, General Motors had become a poster child for what ailed American competitiveness. The liabilities of the company had become bloated with promises to union workers that became impossible to keep – promises based on hope, not reality. Those demands caused costs to rise, resulting in shoddy manufacturing using cheaper, less reliable components; competition from abroad produced better, safer cars, forcing American companies to compete on price. CBS News calculated in a February 26, 2009 report that GM lost $3700 per vehicle produced in 2008.

During the two and a half decades following the end of World War II, General Motors came to symbolize America’s growing industrial strength and its reputation for quality. In 1953, Charles Wilson, President of GM, was nominated to be President Eisenhower’s Secretary of Defense. In response to a question about conflicts of interest, Mr. Wilson replied: “For years I have thought that was good for our country was good for General Motors.” For years Mr. Wilson was misquoted, as saying what was good for GM would be for the country. That seems to have been the interpretation that President Obama took yesterday in praising the offering and suggesting that tax payers were well on their way of getting their $50 billion investment returned.

In a sense GM had made a pact with the devil, as they had subordinated the interests of shareholders to the demands of union workers. The end game was inevitable. The shutting of the markets for the issuance of commercial paper in late 2008 forced the issue. GM, without a government bailout, would be forced into bankruptcy. The Bush administration, in late December, advanced the company $13.4 billion. The terms of the loan, according to a Wall Street Journal report at the time, required the company “to extract enough concessions from workers, suppliers, dealers and other stakeholders to demonstrate their long-term viability by the end of March.” In doing so, the administration turned the tough decisions over to the incoming Obama administration. Shareholders had already been punished. On November 24th 2008, General Motors closed at $2.92, “Its lowest close since April 1943”, according to CNNMoney.com. Merrill Lynch had a “sell” on the stock with a price target of $0.01.

Within a month of his inauguration, President Obama injected another $36 billion – pushing the total investment to $50 billion. In March, the administration backed new car guarantees and forced the firing of CEO Rick Waggoner. But that still was not enough to save the company. So on June 2, 2009 GM became the second largest industrial bankruptcy in history, a bankruptcy orchestrated by the government. At the time of the filing, GM had $172 billion in liabilities and $82 billion in assets. A government induced bankruptcy permitted the court to place the bond holders beneath the unions and, according to today’s Wall Street Journal, allows the company to exercise a tax-loss carry forward on $45 billion, a provision not typically permitted. As the Journal puts it: “Translation: Taxpayers will continue to aid GM for years.” Forty days later, on July 10, the company emerged from bankruptcy, far more quickly than most had expected. Bankruptcy allowed the company to slash its debt and healthcare obligations by $48 billion, drop almost 40% of their dealers and shed unwanted brands. Old, unwanted assets, including shuttered plants, became Motors Liquidation Co., which is expected to remain in bankruptcy for some time.

Emerging from bankruptcy, stock ownership was as follows: the U.S. Treasury, 60.8%; the UAW, 17.5%; the Canadian government, 11.7% and the bond holders, 10%. At $33, the equity value of the new company is about $50 billion. The bond holders had been owed $27 billion. Based on the offering their stake is now worth about $5 billion. In contrast, the UAW’s health plan, owed about $20 billion, is now worth approximately $8.5 billion.

Yesterday’s IPO amounted to 478 million shares. An additional 71.7 million shares are expected to be offered as the underwriters exercise the green shoe. Ninety-four percent of the offering traded yesterday, suggesting a number of those offered stock on the deal decided a quick profit was worth more than the risk of holding on. Of course, for every share sold there was a buyer. The unknown question is how much of the buying was done by the underwriting syndicate. The next few days will tell that tale.

The government needs the stock to trade above $53 (60% above the close) to break even on its $50 billion investment, and that doesn’t include ongoing taxpayer support. Nevertheless, we are better off for the public offering.

The bigger question is the one that asks: was what was done for GM will be good for America? Time will answer that question. There is little question that jobs have been saved, but at what price? The company has been given the opportunity for renewed life; debt and obligations have been eliminated; dealers have been closed and unsellable assets discarded. Some of the old problems like unrealistic union demands, though, have been back-burnered, not eliminated. Government’s involvement persists. Promoting a “green” car, the Chevrolet Volt, priced at $40,000, is a priority of the administration. Given an average income in the U.S., the price is high, even with a $7500 tax credit – another indication that tax payers are still on the hook. Does this portend more government involvement in industrial policy? Will it be good for America? I’m skeptical, but at this point the jury is out.