General Motors bankruptcy and nationalisation: exit strategy needed

Congratulations: if you are a US taxpayer, you will soon be a part owner of a car company.

Under the latest reorganisation plan for General Motors, Uncle Sam would take ownership of 72.5 per cent of the troubled automaker while providing an additional $30 billion in funds to the company.

The proposed deal would give Washington controlling ownership of a major industrial corporation for the first time since Conrail railroad was sold in 1986. And, along with the pending acquisition of a minority stake in Chrysler, it would represent the first time the US has ever owned an automaker - joining China and several European governments in that club. It is a road less travelled, for good reason, and one America needs to exit.

Government-directed bankruptcy

The reorganisation plan was filed by the government with the Securities and Exchange Commission last Thursday, May 28. At the same time, bankruptcy proceedings for the much smaller Chrysler Corporation are being wound up.

Of course, bankruptcy itself is not necessarily bad news; the process is often the only way for troubled firms to reorganise themselves. The process for General Motors, however - as has that of Chrysler - is to be a government-directed and politically dominated affair, funded largely by tax dollars and creating firms controlled by Washington.

The short drive to bankruptcy and nationalisation for Detroit began last December, when GM and Chrysler first accepted bailout money from the government. Both firms were required, as a condition of aid, to prepare detailed plans to return to viability. In March, those plans were flatly rejected by the White House, which (correctly) found the changes being proposed far from sufficient to resolve the problems of the firms.

From that moment on, Washington took over the driver's seat for both firms. To emphasise the point, President Obama took the unusual step of effectively, and unceremoniously, firing GM's chief executive officer Rick Wagoner and half the GM board.

Washington calling the shots

Since that time, the federal government has been calling the shots for both automakers. Tellingly, the reorganisation plan Chrysler took into bankruptcy was announced not from the firm's Detroit HQ or a courthouse, but from the White House. And creditors who opposed that deal, pointing out that they would get a mere fraction of what the United Autoworkers Union (UAW) would get for its claims, were personally lambasted by the President for their failure to pursue what White House spokesman Robert Gibbs called the "common good". Thanks to government pressure - and billions in additional taxpayer funds - Chrysler is soon expected to emerge from bankruptcy with ownership shared among Italian carmaker Fiat, the UAW, and the federal government.

(The bankruptcy plan developed by the government employed novel techniques for avoiding claims by upset creditors, by which Chrysler's assets were sold to a newly created entity, leaving a rump, debt-ridden firm. For more detail regarding this approach, see Andrew Grossman, "Bailouts, Abusive Bankruptcies and the Rule of Law," testimony before the Judiciary Committee, US House of Representatives, May 21, 2009.)

Now it is GM's turn in court, with a filing expected by June 1. As outlined in the government's SEC filing, current GM bondholders will be offered 10 per cent of the firm's stock plus warrants for an additional 15 per cent, in return for their $27 billion in claims. The UAW, by contrast - which is owed some $10 billion by GM for health coverage claims - will receive 17.5 per cent of the stock, plus another 2.5 per cent in warrants and $6.5 billion in preferred shares.

This favouring of the politically influential UAW has led many creditors to oppose the deal. If creditors are not pressured (as were Chrysler creditors) to accept the offer, the issue goes to court, to be decided by a bankruptcy judge.

These relatively small ownership shares, however, will be dwarfed by the 72.5 per cent stake to be grabbed by Washington. This stake will come at a cost to the taxpayer: at least $30 billion in additional loans to be provided to GM, on top of nearly $20 billion already lent. (Of this, $8 billion will remain as loans to be repaid.)