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. 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.
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 under funded by roughly $10 billion. That’s $30 billion in legitimate claims.
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.”
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.
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.
The current market cap of the new GM is $34 billion, right around the same number that could have been raised in liquidation. The bankruptcy court should have given the unions roughly $15 billion worth of cash or new equity and the same thing to bondholders. It’s none of our business.
Remember… the purpose of bankruptcy isn’t to repay creditors. They’re screwed. They’re not getting all 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. Other carmakers are paying $47 per hour – these aren’t bad jobs.
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.
… 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.
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. The union 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 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.
Adam Jonas, He claimed GM had gotten rid of 20% of its roughly $100 billion total pension obligation by spending only “$3 billion. The credit ratings agencies warned they “might” have to downgrade GM’s debt. 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. It would cost GM roughly $50 billion to wipe out all its remaining pension liabilities.