Bin Laden is dead and Twinkies are alive! That might have been the rallying cry if we were in an election year and if the Bakers Union was deemed as important as the UAW to the parties seeking reelection. But the Obama Administration is not as dependent on smaller unions, like the Bakers Union, for contributions and votes. That fact allowed the Hostess bankruptcy to proceed in an unimpeded manner in which such processes were designed to.
It was recently reported that the Hostess bankruptcy would not lead to the end for brands like Twinkies, Wonder Bread, and a bunch of others. The initial filing brought speculation that Twinkies would disappear forever as panic set in for junk food enthusiasts and lead to boxes of the iconic brand being hoarded by many. The outcome can give us some insight into how the General Motors bailout could have been handled differently.
The Obama team that orchestrated the GM bankruptcy process declared that the only way for GM to survive was to use $50 billion dollars of taxpayer money and restructure the company precisely as President Obama’s Auto Task Force dictated. Claims were made that no other entity would put up money to save brands like Chevy or Cadillac. In hindsight, do you really believe that Twinkies and Ho-Hos would be worth investing in while Chevy would not be?
The truth is that no competing bids on GM were allowed by the Obama team. The offering price by taxpayers was set so high to protect UAW assets. No other bid would be deemed “qualifying” if those UAW interests weren’t protected, so the Task Force controlled the game. Americans were fooled into believing that no private party was interested in putting up money to save GM’s brands when the fact was that the Obama Administration did not want any other party in control of the UAW’s fate.
What might Hostess now look like if the government controlled its bankruptcy process? I can picture healthy, high-priced, subsidized, union-produced packs of healthy snacks replacing Twinkies and other market-based choices. Maybe consumers could get a tax credit for each healthy snack purchased. That would help force a product on the public that they otherwise wouldn’t have wanted. Taxpayer money could be wasted while not really having a feasible long-term plan for success for the bailed-out company. Kind of like how GM now focuses on green, money-losing vehicles like the Chevy Volt instead of on cars that drivers actually want.
Let’s face it; politicians are not always entirely honest with their proclamations. But when politics mix with multi-billion dollar industries, the potential for dishonesty expands exponentially. GM has recently announced earnings that were driven by questionable accounting practices. Another junk food producing corporation gives an example of what happens when deception is used to drive Wall Street results. GM should take note of how Krispy Kreme Doughnuts’ shares eventually plummeted after accounting tricks were used to drive earnings.
Krispy Kreme (KKD) share price hit a high of about $49 a share in August of 2003. About a year later the shares had plummeted to approximately $14 a share; a price at which they still currently hover. The deceptive accounting that formerly drove share price eventually came to light and reality set in. According to one article that reviewed the Krispy Kreme fall from grace, “Franchisees alleged channel stuffing, claiming that some stores were getting twice their regular shipments in the final weeks of a quarter so that headquarters could make its numbers.” Channel stuffing is something that GM has also been accused of utilizing to drive revenue.
As I previously reported, North American inventory at dealerships for GM have increased over 20% since the end of 2011. Specifically, GM reported that there are 717,000 vehicles in inventory at the end of 2012 compared to 583,000 at the end of 2011. That would account for the reported “growth” of revenue as GM is able to record vehicles that go to dealerships as “sales,” even though consumers haven’t purchased them. Most investors are not aware that there is no “real” revenue growth at GM as the company has lost market share in their most critical market.
Another shady practice that came back to haunt Krispy Kreme was the manner in which franchise buybacks were accounted for. According to another report, “Company documents show it has been booking most of the spending as so-called intangible assets, which don’t have to be amortized. The result: Krispy Kreme’s reported earnings are higher than they would have been had it written them off.” The accounting for intangible assets by GM has been an area of concern as I have also reviewed. In its most recent earnings report, GM has shuffled billions of dollars of goodwill and tax allowances, specifically using a $35 billion tax credit to offset what would have been a GAAP (Generally Acceptable Accounting Practices) loss of $30 billion.
The bottom line is that past examples of deception by publicly-traded corporations, like that of Krispy Kreme, usually are eventually exposed and do not end well. When Krispy Kreme’s problems first became apparent, the company tried to blame the Adkins low-carb diet for the shortcomings. Such deception brings to mind GM’s false claims that low Chevy Volt sales were a result of lack of supply or a Republican conspiracy to hurt sales.
The Hostess process showed that major brands can survive a bankruptcy process without governmental control and masses of taxpayer money; the Krispy Kreme accounting scandal teaches us that deception and shady accounting practices are only a temporary foundation for shareholder value. While the former enhances our hindsight, the latter may give a foreboding indication of which direction GM is now heading.
Mark Modica is an NLPC Associate Fellow.