Most news we hear regarding General Motor’s IPO this week proclaim the event as a huge success. It would be prudent to consider whether the process leading up to and following the auto industry restructuring should be a template for future restructurings, as Al Koch (head of Motors Liquidation or “Old GM”) has stated. While some may argue the positive aspects of the GM bailout, it is more than just sour grapes or GM hating that contributes to a desire to have a continuing dialogue on the precedent setting procedures that may lead to a subversion of contract law that has governed for over 200 years in this country.
First, there should be recognition that some creditors were favored over others in the GM bankruptcy process. It can be spun any way apologists want, but the facts are clear that politically favored groups, i.e. the UAW, were favored over bondholders. Is this part of a new template to follow that is really in the best interest of America? While more time can be spent exploring the moral hazards of allowing the US Government to determine who should benefit in a bankruptcy process, for now there is a more pressing question. Did our government’s actions actually fix what is wrong with GM?
For years, General Motors has been plagued by UAW costs, poor management, high debt and less than competitive products. The Obama Administration chose to turn to bankruptcy advisors and financial market experts when they created the Auto Task Force to restructure Chrysler and GM. If the desired outcome was to have a healthier American auto industry, I would argue that auto industry experts would have given better counsel to fix what was wrong with GM. The main benefit to GM as a result of its bankruptcy process was a removal of $27 billion of debt held by GM bondholders. This benefit, along with an infusion of taxpayer money, buys GM time as it tries to succeed in a highly competitive market. There are warning signs that this is a temporary fix.
It should be a concern to investors in the new GM that so much emphasis is being put on the new Chevy Volt. Shareholders should expect a clear path to profitability, not a PR campaign with political undertones that imply that GM is taking the responsibility for saving the world from global warming by offering a vehicle that will not make a profit in the foreseeable future. Other concerns include questionable management, continued UAW overhangs, lack of captive financing, European/Opel losses and ineffective accounting controls. Most of these have been brought up here before, so we can move on to a review of one of the most egregious areas of past moral failings in the GM restructuring process.
Americans were deceived by General Motors and President Obama’s Auto Task Force when the administration stated that the Task Force’s goal was to restructure the auto industry outside of bankruptcy. In an effort to disguise this deceit, millions of taxpayer dollars were spent to devise an offering to GM bondholders for an exchange of debt for equity. Lawyers prepared a 200 page document that was mailed to hundreds of thousands of individual bondholders as part of the ruse. The offer required 90% acceptance by bondholders to avoid bankruptcy and terms like “it’s in the bondholders’ hands now” were used. Those close to the deal knew the offering was designed to fail, as it would be impossible to locate and get acceptance from 90% of bondholders even if the offer had been a fair one. The resulting acceptance number was never publicized and was estimated at less than 10%. The questionable aspects of this offer have never been criticized to now. In fact, the only investigation by Congress in to the unprecedented nationalization of the auto industry by the executive branch of government was headed by Elizabeth Warren, who President Obama recently described as a “dear friend”; this as she was rewarded a prominent position as head of a cabinet consumer advocacy group. It should not come as a surprise that the resultant report on the auto restructuring investigation did not uncover wrongdoing. This view had a dissenting stance from panel member, Rep. Jeb Hensarling.
Perhaps incoming chairman of the House Oversight Committee, Rep. Darrell Issa, will question the events and reopen a discussion on whether or not America believes the new GM bankruptcy template should be used in the future. At this point, additional areas of concern that warrant probing are: taxpayer funded subsidies for GM in the form of a $7500 federal tax credit for Chevy Volt sales, a $45 billion tax loss carryover benefit granted to GM, continued government sponsored help to GM and Chrysler in the form of a “backdoor” bailout provided through funding by government owned Ally Financial and, lastly, accounting questions regarding GM’s reporting. The financial reporting issue revolves around GM’s revenue recognition and balance sheet when they offered shares to the public after admitting they have ineffective internal controls. If these accounting issues lead to a new group of investors being hurt by General Motors, many involved will have tough questions to answer. One of which will be, “was this process really so great for America?”