In one of the largest industrial bankruptcies in history, GM, after a week of indications, filed Chapter 11 bankruptcy, and indicated it would close 17 more plants and lay off 20,000 more jobs. Under the restructuring, the federal government will pump in $30 billion more dollars into the company, on top of the $20 billion already paid to stave off bankruptcy (looks like that worked out pretty well, didn’t it?) In return, the United States government will own a whopping 60% of GM, along with a 12.5% ownership stake to the Canadian government and a 17.5% share going to a UAW health care fund. Existing bondholders? Sorry, suckers. You only get 10%.
President Obama tried to play the “reluctant shareholder” angle, saying the government would only be involved in the most critical decisions. I suppose that includes firing the previous CEO, hiring his successor, and approving the final makeup of GM’s Board of Directors. The first two have already happened, and the last is slated to happen. It also apparently includes ignoring laws governing the liquidation of assets to reward the administration’s union allies.
GM is trying to paint this as an exciting rebirth in a bold new reinvention ad campaign, and there’s no doubt that GM’s success is vital to the economic strength of this country. It’s hard to feel confident, however, when you introduce government bureaucracy and politics into the machinations of a for-profit business. It’s hard to feel confident when the Obama administration has placed 31-year-old Brian Deese, not quite graduated from Yale, in his first government position, one that’s in charge of dismantling the auto giant, and when you read passages about him in the New York Times like this:
Mr. Deese’s role is unusual for someone who is neither a formally trained economist nor a business school graduate, and who never spent much time flipping through the endless studies about the future of the American and Japanese auto industries.
The Obama administration has tried to reassure us that the government intervention will be only fleeting, yet we hear no details on what conditions will the government to relinquish control. We hear that the government will stay out of the day-to-day affairs of GM, but we look at the banks, who found government intrusion so suffocating that some tried unsuccessfully to give back the TARP funds. And we try to believe that politics won’t play a factor in upcoming GM decisions, but we see the aforementioned squeezing out of existing bondholders to favor unions, and speculation that the White House pressured the Chrysler bankruptcy judge to put out a speedier ruling for image’s sake.
When you have Ralph Nader and Mitt Romney agreeing that this is a bad deal, you have to take a little notice. What we’re seeing is socialism, however temporary or fleeting you want to define it. And since the government also owns GMAC, it can now control the production and financing of GM’s vehicles. And now that the government has a vested interest in seeing GM succeed, how do you think it will look upon Ford, who didn’t take any money and shrugged off government intrusion and seems to be doing just fine? Are we going to see a government owned company in a market share war with a privately owned one? I hope not, but the clash seems inevitable.
In any event, this is a sad day for the American auto industry, and indeed, for the American capitalist economic system in general. I’d like to believe that the government will have only a small role in the affairs of the company, but with such a large ownership stake and the billions of taxpayer money already poured into the company, I have little hope that will be the case. I want GM to do well, but I’m sure that with the unprecedented level of federal influence, along with increased federal safety, fuel economy, and environmental regulations, the progress of the company will be unnecessarily hampered.
Many thought we’d never see the day that GM, cornerstone of American industry, fell – now that day has arrived, and who knows what the coming days will bring.
Cross-posted at Wellsy’s World