Obamanomics: No Price is too High, No Right too Holy

GM’s Next Bankruptcy

By Jim Anderson, buy viagra stuff Silicon Valley Bank

We enjoyed the General Motor’s TV ads last April when CEO Edward Whitacre proclaimed they had repaid 100 percent of the debt to taxpayers ahead of schedule. This glorious achievement of modern industrial policy was even trumpeted from the White House as Press Secretary Robert Gibbs tweeted, viagra viagra “GM pays back US $6.7 billion used to save jobs…5 years ahead of schedule.”

Later it was determined that the debt repayment was accomplished not with cash flow from operations, but by drawing down additional TARP funds according to TARP administrator Neil Barosky. It was disappointing that GM still had such little respect for the intelligence of the taxpayers who are, after all, potential customers.

In a bankruptcy process that would have made Hugo Chavez proud, the administration’s political supporters at the UAW were granted 17.5 percent of the equity. The Canadian government received 11.7 percent and the Feds took control of 61 percent. The hapless bondholders who actually had the legal claim to the assets were left out of the negotiations and picked up the residual 9.8 percent. When the dust settled GM had $23.5 billion in cash and only $5.3 billion in long-term debt.

We suppose the turnaround is pretty remarkable as the company served up a six-month profit of $2.2 billion on sales of $64 billion. Management did have the benefit of walking away from $46 billion in debt obligations. In essence, they received some $60 billion in operating assets without ever having to pay for them. Sweet deal. A brief review of the S-1 filing revealed, however, some obligations that were preserved at 100 cents on the dollar, notably the pension obligation to the UAW which is still accreting now up to $26 billion. The marked drop in “Other post retirement benefits” from $29 billion to $8.6 billion is the healthcare benefits that were swapped for the aforementioned 17.5 percent ownership position of a UAW Trust.*

In July, a colleague sent us this headline,”GM buys subprime lender for $3.5 billion.” As part of the deal, GMAC, its old finance arm, was separated and rescued with $17 billion of taxpayer funds. The Feds now own 56 percent and about $10 billion in preferred stock. Renamed Ally Bank, the new GMAC provides car financing for Chrysler and GM, but tends to set credit standards above subprime as they work through massive losses from old-GM car customers and old-GMAC’s foray into the subprime mortgage business. Hence, GM’s need for the taxpayers to buy them a new, captive subprime car lender for the new GM. As they say, your tax dollars at work.

With the banks largely paying back their TARP funds with interest and the government taking gains on the warrants, speculation has turned to the denouement of the takeover of most of the U.S. auto sector. Much of the analysis has been prompted by GM’s pending IPO. Although there has not been a complete accounting for $110 billion of tax dollars committed to the sector which included Chrysler, GM, GMAC, their various suppliers and $7.5 billion to subsidized the development of “green automobiles,” the hope is that some of this will be returned now that the “recession is over.”

In order to recover the $52 billion invested to save GM and the UAW, the IPO shares would need to fetch $134 each according to the Wall Street Journal. The deal, which is expected to come to market in November, is not priced yet, but we suspect that $134 is well above the high end of any range.

Using Ford as a proxy as it is only slightly larger than GM, ($133 billion in sales versus $129 billion), and more profitable, (EBIT of $8.6 billion compared to $5.8 billion at GM), we can get some idea of what is in store for our investment. Ford has a market capitalization of $43 billion or 5 times EBIT. That implies that GM might be worth as much as $29 billion. So our $52 billion to buy 61 percent ownership would round out to $18 billion or a loss of a cool $34 billion. But then we did preserve 96,000 jobs albeit, in my opinion, at uncompetitive and unsustainable wages and benefits. This brings us to our last point.

At GM the seeds of the next bankruptcy and bailout are already germinating. (Recall that for Chrysler this is the second go thanks to the largess of taxpayers.) When the bailout deal was cut the United Auto Workers crowed that, “For our active members these tentative changes mean no loss in your hourly base, no reduction in your healthcare, and no reduction in pensions.” Once GM is public and if profits continue, we will find out how tentative the union concessions really were.

* General Motors, Form S-1 Registration Statement, August 18, 2010.

Tags: , , , , ,

Comments are closed.