Porter Stanburry:-
Now... in the June issue of my
Investment Advisory,
I argued that the "bailout" of GM has been catastrophic for Detroit. I
showed that commercial real estate has fallen by an additional 60% over
just the last five years. And I predicted the real estate market is
foreshadowing what will eventually be another catastrophe at GM. The
issue is simple: the bankruptcy process resolved none of the company's
core problems. The process was subverted by the political establishment,
which sought to protect one class of citizen, at the expense of the
regional economy, GM's bondholders, and its customers.
The
GM situation is very important to understand because it's a microcosm
of what's gone wrong in our country. If we can't apply the rule of law
and sound economics to fixing one of the world's most important
manufacturing concerns... it doesn't bode well for anyone else being
afforded these privileges, either. Most people simply don't realize that
the bailout of GM wasn't a bailout of the company. It wasn't a bailout
of its shareholders, who lost everything... or its bondholders, who lost
almost everything. Where did the money go? To the union. The United
Auto Workers (UAW) ended up with all the money. Let me show you how it
happened...
GM
slid into bankruptcy primarily because it couldn't profitably
manufacture cars. (Yes, there were plenty of other issues, like too much
debt, investments in subprime mortgages, etc... But the primary reason
it couldn't solve these other problems was that it hadn't been making
routine profits from manufacturing cars in about 20 years.) And the
biggest single reason it couldn't profitably make cars was because its
labor costs had soared. Well, guess what? At $56 per hour, GM still has
the highest labor costs in the industry.
The
bankruptcy process didn't deal with the biggest financial hurdle GM
faces, which is an enormous (and growing) unfunded pension liability.
When the company entered bankruptcy, it owed $20 billion to the trust
that was established to pay for the health care of its retired workers.
Its pension program, with $100 billion in obligations, was also
underfunded by roughly $10 billion. That's $30 billion in legitimate
claims, the union had to present to the bankruptcy court on behalf of
GM's employees. It could have received a mixture of cash and equity in
the new GM – just like any other unsecured creditor.
But there wasn't really a bankruptcy court. Instead, there was
Steve Rattner – "the Rat," as we call him – the crooked Democratic
political operative under investigation for bribing New York State
pension officials. Obama made him the "car czar." And his job wasn't to
fix GM. It was to deliver billions to the union and thus, deliver
Michigan for Obama in the next election.
Bondholders
at GM were owed $30 billion, too. A legitimate bankruptcy would have
sold or liquidated the company's assets and split the proceeds between
the two major claimants, the bondholders and the unions. GM had roughly
$20 billion in tangible assets, plus probably another $10 billion in
intellectual property. These sums could have either been liquidated or
put into a new company, with the equity split between bondholders and
unions.
Not surprisingly, the current market cap of the new GM is $33
billion, right around the same number that could have been raised in a
liquidation. The bankruptcy court should have given the unions roughly
$15 billion worth of cash or new equity and the same thing to
bondholders. Everyone would be square. And the company (or at least the
company's assets) would have been freed from the stranglehold of huge
debts and pension obligations.
Taxpayers
shouldn't have paid a dime in this process, because frankly, it's none
of our business. Remember... the purpose of bankruptcy isn't to repay
creditors. They're screwed. They're not getting all of their money back
because they bet on the wrong horse. That's how capitalism works. That's
the price of liberty – you're free to make bad choices.
The purpose of bankruptcy is to free productive assets from the
burden of debts that can't be repaid or refinanced. We do this because
it's good for society, not because it's good for creditors. Had the
bankruptcy been handled legitimately, GM's assets would have ended up in
the hands of better entrepreneurs. Its workers could have found new,
productive jobs at a rate the market would bear. (Other carmakers are
paying $47 per hour – these aren't bad jobs.)
Yes, GM's retirees, its pension program, and its bondholders would
have taken a hit. But they wouldn't have walked away empty-handed. They
would have been the owners of a profitable company, operating debt-free
and without the burden of seemingly endless obligations to a pension
fund.
But
that's not what happened. Instead, the government injected an amazing
$50 billion into the company and, at last count, has lost roughly half
of it. How did taxpayers lose $25 billion on a company whose total
tangible assets were only worth $20 billion? How did bondholders lose
almost all of their $30 billion, too? And most importantly, how did our
country end up with a GM that can't earn a genuine profit because of
never-ending obligations to its pension fund? I think you probably know,
dear subscriber. The Rat did what he was being paid to do... he
delivered billions and billions of dollars to the union. Amounts that
will never be recovered... billions that will never be found.
Here's
what we do know about where the money went... Bondholders got 10% of
the new GM – about $4 billion worth of stock at the time of the IPO.
However, they weren't allowed to sell until much later, so that value
dropped about one-third by the time they could have actually liquidated.
Thus, bondholders ended up getting about 10 cents on the dollar. The
unions, on the other hand, got paid 100% of the pension liability –
about $10 billion, which was simply passed onto the new GM and has now
grown to $13 billion.
In addition, the Union's health care trust got 17.5% of the new
equity (worth about $6 billion), plus $9 billion in preferred stock and
notes. These securities are not only worth more, but they will also
likely end up with essentially all the company's cash flows for the next
decade. In total, the unions walked away with about $28
billion in cash and stock (out of $30 billion owed). Not surprisingly,
that's almost exactly the amount of money that's gone missing from the
government's accounts.
They also retained a position of absolute control over the
company's earnings. In short, the unions got paid 93% of what they were
owed and will very likely continue to have a legal claim to virtually
all of GM's cash flow. The bondholders got a few pennies. The taxpayers
lost $25 billion. And GM still can't make a real profit. Bravo!
I'm
sure that folks as virtuous, thrifty, and honest as the good people of
the UAW will prove to be excellent stewards of GM's assets and
reputation. Surely GM's future has never been brighter. And Obama's
legacy as the savior of Detroit is assured...
By
the way... the numbers above are all real. Most of the stuff you see
reported about GM is not. There's a good reason for this, of course...
the government continues to own a large portion of GM's stock, and GM is
one of the largest advertisers in the U.S. Nobody wants to take on
those two powerful interests.
Take, for example, what Morgan Stanley's GM analyst, Adam Jonas, told the
Wall Street Journal
last week. He claimed that GM had gotten rid of 20% of its roughly $100
billion total pension obligation by spending only "$3 billion." Imagine
if that was true! If the company was able to resolve $20 billion in
obligations by spending $3 billion now, well... that would dramatically
improve the financial standing of the business and probably double or
triple its stock price. Strangely, that's not what happened. Instead,
the credit ratings agencies warned they "might" have to downgrade GM's
debt. And the share price continued to fall...
I
don't know Adam Jonas. And I don't know that the paper is quoting him
fairly. But whatever the case, nothing could be further from the truth.
GM unloaded $26 billion in future pension liabilities by contributing
$25 billion in pension fund assets, $1 billion in cash, and paying $3
billion in an insurance premium. So what actually happened is that the
company put virtually all of its earnings – $4 billion – toward its
pension (again) and saw the total unfunded liability drop by a mere $1
billion, from $14 billion to $13 billion.
Assuming the rest of these liabilities could be extinguished at the
same rate, it would cost GM roughly $50 billion to wipe out all its
remaining pension liabilities. Strangely, neither Jonas nor the Wall Street Journal saw fit to mention that part...
I'll
leave you with these two simple questions... If we can't count on the
media to keep us informed about the major problems of our country's most
important companies... and if we can't count on the government (which
still owns 26% of GM's equity) to deal with its pension obligations
honestly and fairly... what does this say about the likely future
prospects of GM? What does it say about our country?
