GM Losses

The big news this week was not the General Motors decision to file for bankruptcy. It was the federal government's decision to give GM $30 billion dollars for a greater share of ownership before it declared bankruptcy. A couple of things come to mind.

The scale is large. The company already received $20 billion from the federal government. $50 billion is a very large sum of money (not to mention the $9.5 billion contributed to GM by the Canadian government). The 2010 Obama budget allots $11.6 billion for the Social Security Administration of the entire nation. There are other numbers on this scale, but the point is a single company payout on that scale is remarkable.

It would have been cheaper to allow the company to declare bankruptcy, purchase the viable components, and relaunch a new company untethered by the flaming ashes of unsound GM. According to the paperwork filed for the bankruptcy court, GM has assets worth $82.29 billion but owes $172.81 billion in debt. This was the investment our government doubled down on, a corporation worth negative $90 billion. It's the type of thing funny in a movie, but very depressing in reality.

In cash value, GM represents the fourth largest bankruptcy case on record. The larger being Lehman Brothers, Washington Mutual, and WorldCom. Hardly a great precedent by any means, but it is really unclear how the federal government opted to not inject billions into those bankruptcies yet found GM worthy of an entangling $50 billion payout. On the contrary it was never considered for Lehman nor WorldCom and Washington Mutual had its banking operations seized and sold to JP Morgan from underneath it and effectively forced into bankruptcy by the government.

The tale told about GM speaks of job losses. GM has bled jobs for years. It was reported that GM had 150,000 salaried workers in 1979, 91,000 in 1991, 82,000 in 1992. The GM employee release indicates it will reduce to 27,200 salaried workers in 2009. Recorded total workforce (hourly plus salaried, worldwide) indicates 853,000 in 1979, 877,000 in 1986, 766,000 in 1988, to 388,000 in 2009. It is a trend not limited to GM; the Bureau of Labor Statistics tables show nationwide auto industry job figures on a steady decline from 2000 to present with the current tally roughly half its number from 2000. BusinessWeek ran an article speculating about GM bankruptcy - in 2005. It's predictions about the effects of bankruptcy are bleak.

My wife asked me where the $30 billion will go. It's a great question. In bankruptcy its funds would go towards currently owed bills first and debt holders have their claims suspended while the business operates until either it recovers enough to repay or else liquidates. In other words, the court would help decide whom of the parties owed to be repaid after covering the operating expenses of the corporation. However it assures the government position of prime lender to be repaid while GM is bankrupt. According to the official release:

GM will use its cash-on-hand and a new Debtor-in-Possession (DIP) financing of approximately $33 billion to: ensure an uninterrupted supply of goods and services and provide for other cash requirements prior to closing of the asset sale; fund liabilities to secured lenders; and provide contingency funding to handle any potential unexpected needs. Furthermore, in conjunction with the sale, the U.S. Treasury and the Canadian and Ontario governments will provide funds to administer the wind down of the remaining assets and the closing of the chapter 11 cases

The key words in there for me are 'prior to closing of the asset sale' which indicates who might be paid first; those whom GM owed bonds. Per the bankruptcy filings, this originally offered $27 billion for unsecured bonds and was not enough to entice bondholders to write off the difference in that offer and the amount owed. These may include governments other than Canada and the US. It sounds as if the bankruptcy filing strong-armed the bondholders into accepting the $27 billion and the Fed wanted that written into the agreement before the investment could be secured in court.

Everyone wants to know who owns this "New GM", because the cash was given in trade for a piece of ownership. According to the release:

Common equity, 60.8 percent of which will be owned by the U.S. Treasury, 11.7 percent of which will be owned by the Canadian and Ontario governments, 17.5 percent of which will be owned by the New VEBA, and 10 percent of which has been reserved for GM for the benefit of the unsecured bondholders and other unsecured creditors of GM.

That's 60.8% to the US federal government, 11.7% to the Canadian government, 17.5% to the United Auto Workers union, and 10% to the investors currently owning worthless debt owed by GM. The stockholders now have completely worthless pieces of paper.

If you are a stockholder or a bondholder you lose. If you lose your job from the restructuring or you pay taxes and this will not help you keep your job, you lose. If you are a worker that keeps your job, you lose some benefits per renegotiated contracts. If you are a retired worker you will soon lose some portion of you retirement benefits. Lose-lose, sad story all around.