NLPC Associate Fellow Mark Modica was interviewed by Tom Sullivan about GM’s future on Fox Business Network on August 11. Here’s a transcript:
Tom Sullivan: Joining me now is an Associate Fellow at the National Legal and Policy Center, Mark Modica. You follow this GM story carefully.
Mark Modica: I sure do.
Tom Sullivan: Do you agree with the other Mark about the fact that GM is looking pretty good right now?
Mark Modica: I agree with some of the comments. The European situation is a mess, so that is an overhang there. As far as the government getting out – no professional investor would say that you base your exit of owing a stock on what you paid for the stock. The government should have been out of GM. They had the opportunity over a year ago to sell their stake – the taxpayers stake. At that time, shares were trading over thirty. That is about a five billion dollar loss in value to the taxpayers holding since that time. They have no business being in the industry. They should have gotten out when they first had the opportunity.
Tom Sullivan: They should have, but you know there are a lot of investors out there that know exactly what we are talking about when we say they rode stocks down. You know you are going to wait for it. You do always keep in the back of your mind, well I paid this I am going to take a loss. And the political implications of…Why did you sell at this big loss on the stock? Because it has been a loss since day one for them.
Mark Modica: Well you hit the nail on the head when you said political. There is no other reason to hang onto this thing political at this point. You can’t sell it because you are going to be criticized for the loss. But we have heard this story about how GM was going to look great. The stock was overhyped as was the industry at the time of the IPO. The bottom line with this company is the problems are coming from that during the restructuring the government went towards bankruptcy experts instead of auto industry experts.
The underlying problems which was a bloated management and a bureaucracy along with higher labor costs, really having come down. The goal of the Administration was to protect UAW interests. That has been clear based on the payout to UAW claims compared to those that were non-unionized being GM bondholders. And we see it now with Adelphi situation where union pensions were protected while non-union were not. And it is coming out that the government has something to do with. So, this company was not restructured to the extent where they are going to be the most profitable, it was for political gain and to protect UAW interests. The industry is very competitive. I am sure any expert would agree with that. We didn’t have any consolidation. We didn’t have any players leaving the segment. It remains very competitive. The fact is GM’s pension obligations are still about twenty four billion. That was not mentioned. Those are underfunded pension obligations. Twenty four billion dollars. Their labor costs are still higher than the competition. If the competition can build a car for less money than GM can, they are going to be in trouble in the long term. And when we talk about building good vehicles, in July of the top ten selling vehicles in America, GM didn’t have one car in there. You can see Honda there, Toyota, Ford, sometimes more than once. But it gets back to this company being driven for political reasons…
Tom Sullivan: One other quick question, we have got. GMAC is no longer part of that, now Ally Financial.
Mark Modica: Right.
Tom Sullivan: But GM Financial is making a huge percentage of their car loans of sub-prime care loans. Are they going to get in trouble?
Mark Modica: Well this isn’t a huge problem but it is a warning sign. GM Financial was AmeriCredit which is a sub-prime lender. The majority – this is more of the problem that the majority of loans, the prime loans and leases are coming from Ally Financial, also government owned. Two companies in the industry – major companies that do not have their own cap to finance prime lending. General Motors and Chrysler they are relying on Ally Financial. This company could be in much worse shape if there is any credit tightening and Ally Financial and the government is not there to back them up with the loans. A situation that is probably more worrying than the sub-prime loans is they are relying on government owned Ally Financial to do their financing.
Tom Sullivan: Mark Modica, thank you for your expertise on autos. Thank you so much.
Mark Modica: Thank you.