Call it by the euphemism “restructuring.” But the White House-brokered takeover of General Motors and Chrysler this week has to qualify as one of the most radical moves in the history of American industry. Not only would the Obama administration effectively place these companies under Treasury Department receivership, it would give the United Auto Workers (UAW) a huge financial stake in their operations. Indeed, that would seem to be the point: The administration and organized labor embody the Democratic Party Left. What strengthens one strengthens the other.
The agreement, rushed to meet a government-imposed April 30 deadline, would give the UAW retiree health care trust fund a nearly 40 percent stake in GM and a 55 percent majority stake in Chrysler, the latter having declared bankruptcy yesterday. That fund – a voluntary employee beneficiary association (VEBA) set up a year and a half ago – is set to go into effect January 1, 2010. There is irony in all this. It was crushing union-negotiated health care costs, retirement costs and restrictive work rules that helped drive these companies into federal dependency, a condition that Ford barely has avoided. Even emergency federal loans made by the Bush and Obama administrations – GM’s share alone has risen to $15.4 billion – haven’t been enough.
Now the union and the government get to call most of the shots. An unnamed GM official quoted in April 30 American Spectator Online put it this way: “The U.S. Treasury will be able to elect all of our directors and to control the vote on substantially all matters brought for a stockholder vote.” As it is, the government has forced the respective CEOs of GM and Chrysler, Rick Wagoner and Robert Nardelli, out the door.
Corporate bondholders are the biggest losers. GM currently has $27.2 billion in unsecured bonds held by mutual funds, pension funds, hedge funds and retail investors. How much of that are they going to see? Under Monday’s government offer arranged by Treasury Secretary Timothy Geithner and his auto bailout task force czar, Steven Rattner, it won’t be much. Bondholders would exchange their securities for just 10 percent of the stock of the restructured company. That might wind up being less than five cents on the dollar.
As for Chrysler, its declaration of bankruptcy happened even after the company had reached a deal with Fiat giving the Italian automaker an eventual 35 percent stake on top of the UAW’s 55.5 percent. The U.S. government would get 8 percent and the Canadian government would get the rest. What about the automaker’s current majority shareholder, the equity firm Cerberus Capital Management, which holds a roughly 80 percent position? Its holdings would be wiped out. The holder of the other 20 percent (and Chrysler’s former German parent company), Daimler, also would bite the bullet.
As for Chrysler’s creditors, four battered banks – Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan Chase – hold 70 percent of company debt, while nearly four dozen hedge funds hold the other 30 percent. The company’s secured bank lenders would get no more than a 10 percent stake along with $2 billion in cash to forgive nearly $7 billion in debt. The banks like the deal; a number of hedge fund managers, whom Obama denounces as “speculators,” don’t. They might hold out for more than the government’s offer of 32 cents on the dollar.
Treasury officials defend the arrangements as necessary to ensure that taxpayer loans are repaid. But it’s hard to see how a nationalized company will benefit anyone but the government and its allies, especially the UAW. Since profit under the new regime will be of secondary concern, shareholder equity stands little chance of rising over time. And it’s hard to see how any institution would be willing to loan money to a losing enterprise. Standard Chapter 11 bankruptcy is an unpalatable option, but less so than the force-fed government variety. At least under the conventional arrangement, the companies would get a fresh start and protection from creditors. The Obama administration version will put Chrysler and GM under the thumb of a government-union partnership that veers leftward.
The heightened possibility of union corruption is very real. Remember, the United Auto Workers from now on will be representing both sides of the negotiating table. In theory anyway, that’s a conflict of interest. And the members of the union VEBA board will be subject to approval by the government. Even if the union sells its stake to an outside buyer in return for cash, it’s likely to find a politically friendly suitor. As the Labor Department under Secretary Hilda Solis appears to be putting a low priority on investigating corruption, the opportunities for theft may be enormous. Jack Welch, CEO of General Electric during 1981-2001, summarized the situation: “Looks like unions win, bankers lose.” One hopes there are alternative outcomes — while there’s still time. (Washington Times, 4/29/09; Washington Post, 4/30/09; Wall Street Journal, 4/30/09; American Spectator Online, 4/30/09).
photo credit: AP/Wide World