Treasury and UAW Hand in Hand on GM Offering

It looks like the Obama Administration and the UAW are again working hand in hand as the two entities are coordinating on an offering of a total of 50 million General Motors shares. Treasury is planning on selling 30 million shares as the UAW’s VEBA (Voluntary Employee Beneficiary Association) Trust will sell 20 million shares. The VEBA Trust was formed to cover retiree’s medical benefits for the UAW and received about a 17.5% ownership stake in GM as part of the 2009 bankruptcy process.

The VEBA Trust was formed as part of GM’s negotiations with the UAW back in 2007, well before the GM bankruptcy. The UAW agreed to take responsibility for health care costs for retirees in exchange for GM funding the VEBA account to the tune of about $30 billion. The only problem was that GM didn’t have the cash flow to fund the account. The VEBA deal is one of the main reasons that GM, as well as Ford and Chrysler, were able to lower labor costs to the extent that they did. The common misconception is that GM’s lower costs came solely as a result of its bankruptcy process. It was, in fact, the VEBA deal that was cut before the bankruptcy filing (but kicked in later) that most significantly lowered legacy costs for US automakers.

At the time of the GM bankruptcy filing, the VEBA account was owed about $20 billion by GM. For this the UAW received 17.5% equity in New GM, $6.5 billion of preferred stock and $2.5 billion cash. The payout far exceeded that which the less politically-connected GM bondholders (who should have had equal legal standing as unsecured creditors) received. Bondholders got less than 10% equity and some warrants (giving them the right to purchase additional GM shares at a discount) for about $28 billion of debt that was relieved in bankruptcy.

The current offering by Treasury and the UAW gives further evidence that the two groups have a rather cozy relationship. It strikes me as unusual that two separate major GM insider groups that are the two largest shareholders are coordinating their efforts on selling their holdings. Treasury and the Canadian government have also had meetings to discuss the timing of Canada’s sale of their GM ownership stake.

Despite the obvious cozy relationship between the Obama Administration and the UAW, the Treasury sale is a welcome sight. The sooner the government gets out of GM, the better. The UAW also is well served by selling its VEBA GM stake to lower the risk of future underfunding of the trust that would result if GM share price were to decline. The account is already currently underfunded as assets can not keep up with rising medical costs.

I expect that we have not heard the last of GM’s health care legacy costs which may have to be further addressed in the future, despite the VEBA deal which could end up being only a temporary fix. Let’s hope that taxpayers do not end up being the ones that have to pay, once again, if that time comes.

Mark Modica is an NLPC Associate Fellow.