Streetwise Professor

May 26, 2009

If You Liked the Chrysler Deal, You’ll Love the GM Deal

Filed under: Economics,Financial crisis,Politics — The Professor @ 9:17 pm

Which would make you a member of the UAW (a retiree, in fact):

But in its aggressive dealings with U.S. automakers, most recently General Motors, the Obama administration is coming dangerously close to engaging in financial engineering that ignores basic principles of fairness and economic realities to further political goals.

It  is  now clear that there is no real difference between the government and the entity that identifies itself as GM. For all intents and purposes, the government, which is set to assume a 50 percent equity stake in the company, is GM, and it has been calling the shots in negotiations with creditors. While the Obama administration has been playing hardball with bondholders, it has been more than happy to play nice with the United Auto Workers. How else to explain why a retiree health-care fund controlled by the UAW is slated to get a 39 percent equity stake in GM for its remaining $10 billion in claims while bondholders are being pressured to take a 10 percent stake for their $27 billion?  

Do the math.  The retirees get 4 times as much of the equity of GM, even though their claim is less than 40 percent as large.  That would be a ten-to-one rejiggering of the deal in favor of the UAW members, which would be dubious even if its priority was equal to that of the bondholders.  Since many of the bondholders are secured, and have higher priority than the junior creditors (including the fund), the transfer of wealth from the bondholders to the retirees is even larger.  

The above quote is from the Washington Post, by the way.  Hardly a right wing publication.  If the WaPo is gagging, you know it has to smell really bad.

Update.  Well, you won’t love it as much as the WaPo article would lead you to.  According to the FT, GM unexpectedly announced that the UAW will only get 17.5 percent of the company, plus about $9 billion in other consideration (preferred shares and a note).  Given that their claims amounted to $10 billion, that’s still a much better deal than the (more senior) bondholders are getting.  According to the FT article, the latter still get 10 percent of the equity in exchange for their $27 billion in securities.

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  1. Prof. –

    What you & the Wapo seem to be ignoring is the Gov’t’s obligations. If the retiree health fund runs out of $ at some point, and the gov’t has to take over those obligations, either through PBGC or Medicare. Same for the pension. So the Gov’t is at all points a significant creditor for GM, with no formal seniority*. That $20B obligation# exists whether or not the company goes bankrupt (it’s only $10B in stock – the rest must come in other comp within the next few years). Either it exists for GM or the gov’t. Plus the pension fund is underfunded by $14B, which becomes an obligation for the gov’t post-liquidation. However, your theoretical $27B is generously $3-5B in liquidation. Since the gov’t is set to provide DIP funding of $15B, and has already provided other $19B when no one else would, they *are* the senior debt holder.

    Why shouldn’t the single entity on the hook for ~$34B in post-liquidation costs ($20 Health care + $14 pension), as opposed to pre-liquidation sunk losses of $19B for the gov’t and $27B for the bondholders try to arrange the post-bankruptcy world to look the way it wants and helps the company survive, and avoid shifting those costs to that entity??????

    There is perceived to be an intangible good in the preservation of this company (that’s a separate argument, BTW). To achieve that end, some have to lose. I’m actually surprised that you’ve not mentioned that the common equity holders retain all of their stock (100 times devalued, though).

    As my wife often says:
    “Fair does not mean equal.”

    *The mere fact that we have a law that obliges the gov’t to spend $ (PBGC obligations) without giving us first in line rights to the company is screwed up to begin with, but that’s also a topic for another post.
    # All numbers from:

    Comment by Marc — May 27, 2009 @ 8:52 am

  2. The point of the $27 billion is the respective % claim they have on the underlying assets. Also, your $3-5 billion liquidation figure is just made up. Some senior secured claims are on specific assets where recovery could be significant. My outrage with this situation isn’t about how deep a hole GM managed to dig itself but instead the governments alteration of private contracts for the benefit of a specific group. There is no explicitly logical reason to preference the UAW over the pension funds that are invested in the funds that own the senior secured debt. Re-ordering the priority of claims in this manner should be recognized for what it is and it would appear that even the WaPo can figure that out.

    Comment by bmurphy — May 29, 2009 @ 7:58 am

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