Did President Obama save GM? • George Warren Columnist
Let’s set the record straight. President Obama and his spinmeisters are glibly reporting to the world that he saved General Motors, while Mitt Romney would have let them go bankrupt. It is true that Obama saved them, but it is true again that he also let them go bankrupt first. And therein, as my friend Paul Harvey used to say, lies “the rest of the story.”
Back in the late 60s, after the US had been the arsenal of democracy and saved the world, we were riding a tsunami wave of prosperous economic times. The Big Three American auto makers were kings of the world. The VW bug was only beginning to be popular, and its foreign competitors consisted mainly of Chrysler’s French built Simca, and its French competition, the Renault Dauphine (my brother tried to live with a Dauphine for a while.) No American citizen had heard of a Toyota or a Honda.
The Big Three and the unions had a system of negotiating labor contracts almost annually. “You ask for $12 per hour, we will offer $10, and then we will settle for $11.” In the 50s, they set up funds to pay unemployed workers during layoffs for plant remodeling. In the 70s they agreed to 30 years and out retirement, regardless of age. Then they agreed to cover health insurance for all employees, retirees and their survivors. Unlike our federal government, which has no accounting process for the unfunded liability of future Social Security, Medicare and Medicaid payment obligations, public and private companies are expected to carry these liabilities on the books. They have to set aside money each year to build up reserves.
The imports had gained a 30 percent share of our market by the 80s, and it continues to grow today. By 2000, GM convinced the unions to take over its future health care cost obligations, which amounted to over $46 billion with a “b”. It was killing them. They paid a few billion in cash, and signed a note for the balance, including stock shares. Under bankruptcy laws as they existed for decades, unsecured creditors (those who have no collateral to go against) lose everything. Those who are secured (first mortgages or first mortgage bonds) eventually recover most of their money. But this would have left the union in deep doo-doo.
Enter King Obama! “Tell those secured bondholders they are greedy vultures if they want more than 30 cents on the dollar for their secured debt. Tell the poor shareholders they are just out of luck---goodbye. We agree to advance up to about $70 billion in US taxpayer dollars, and we will own 60 percent of a new GM. But of course, the Congress first has to rewrite all those nasty old bankruptcy laws to protect the union.”
Congress did just that. Apparently every dollar of taxpayers’ money is worth 2 1/2 times that of the bondholders’ money, because they only get 10 percent ownership for their $27 billion in secured debt. But the unions, who had no secured debt, come out smelling like a rose. They get 17.5 percent of the new company. Furthermore, by putting up $9 billion in cash, they are relieved of $20 billion in health care obligations, get a $2.5 billion note receivable, and $6.5 billion in preferred stock which pays them 9 percent interest, or $580 million annually.
GM has now paid the U.S. back $9 billion. They expect to repay us another $50 billion after a new stock offering. Their present total market capitalization is only about $34 billion. Keep your fingers crossed.
And do a lot of serious thinking between now and November.
Printed in the June 14, 2012 edition