GENERAL MOTORS bondholders have until 5 p.m. on Saturday to accept a parsimonious offer to exchange their loans for stock and warrants. Most likely, enough of the creditors will say no to force G.M. into bankruptcy. But there is no escaping the long-term damage that has been inflicted on credit markets by the Obama administration’s attempts to reward the United Auto Workers, one of the president’s strongest supporters in the last election, while trampling decades of legal precedent regarding owners of corporate debt.
The G.M. debacle is déjà vu all over again. In the Chrysler bankruptcy arranged by the government in April, bondholders also got short shrift, while the union, which might have received little or nothing in a normal bankruptcy, was awarded 55 percent of the company.
What’s my interest in this? I head a nonprofit group that encourages developing nations to adopt policies that will lead to prosperity — starting with transparency and the rule of law — and hold up America as a model. Yet in its high-handed dealings with Chrysler and G.M., the Obama administration reminds me of an irresponsible third-world regime, skirting the law and handing economic prizes to political cronies.
Under the complicated G.M. plan, bondholders — ranging from large institutions to low-income retirees — would receive just 10 percent of the reorganized company, plus warrants that would enable them to get 15 percent more should the company’s value reach certain levels, in return for their $27 billion in loans. The government, which could end up putting $70 billion into G.M., would initially get 72.5 percent of the company.
In return for money G.M. owes its health trust, the auto workers’ union would get 17.5 percent of its stock, warrants to raise that share to 20 percent, along with a $2.5 billion cash payout over eight years and $6.5 billion in preferred stock paying a 9 percent dividend. I agree with bondholders who feel the union is getting at least four times as much of G.M. in return for claims that are, at best, equal to those of the creditors.
Even if the courts were to reject the plans for G.M. and Chrysler, the administration’s actions in trying to force the deals may damage the credit markets for years to come. The treatment of the bondholders is a warning to investors that the federal government won’t hesitate to push them aside in a crisis.
Perhaps it’s no coincidence that in the wake of the Chrysler deal we have seen a decline in prices for long-term Treasury bonds and a sinking dollar. The Chinese, for example, could view things this way: If the United States is willing to skirt the law to help some of the president’s closest political supporters gain large pieces of two of the world’s biggest companies, will Washington necessarily stand behind any Treasury securities we own when it becomes politically inexpedient?
The hardball tactics, furthermore, are unlikely to save G.M. In a normal bankruptcy, the company’s assets pass from weak hands to strong. In 2008, a terrible year for the auto industry, G.M. sold 8.4 million vehicles worldwide, collecting revenues of $148 billion that placed it third among non-energy companies on the Fortune 500.
G.M. is a global business, with two-thirds of its revenues coming from outside the United States. While sales last year dropped 21 percent in North America, they rose 30 percent in Russia, 10 percent in Brazil and 9 percent in India. In 2008, G.M. sold more than one million vehicles in China, up 6 percent over 2007.
(The value of its global operations was made clear on Friday when the company reached a tentative deal to sell G.M. of Europe.)
Of course, the company’s problem is that its expenses exceed its revenues. But in strong hands, G.M. could be a going concern. Unfortunately, the new owners, with about nine-tenths of the shares, will be the government and the U.A.W. These are the same hands that shaped much of G.M.’s trouble in the first place. With substantial union co-ownership, labor costs won’t be contained; and with the government as the boss, politics may trump markets in decisions on such matters as where to put plants and whether to build big cars or small ones.
The deal would also put G.M.’s competitors at a serious disadvantage in the short run. Ford, which has been building better cars lately, prudently raised cash against a decline in demand, playing the ant to G.M.’s grasshopper. Now, Ford will face a G.M. buoyed by taxpayer dollars both for manufacturing and for cheap consumer and dealer financing.
The same holds true for the manufacturers that hold the key to future auto-making jobs: well-managed, foreign-based companies like Toyota and Honda, which, according to the automotive analysts at CSM Worldwide, will build more cars in the United States next year than G.M., Chrysler and Ford combined.
What lesson does federal favoritism toward Chrysler and G.M. teach other businesses that play by the rules? How will our trade negotiators keep a straight face when complaining about subsidies to Airbus or Chinese steel makers? The government should have stepped aside earlier and allowed a normal bankruptcy that would have treated the union and the debt-holders fairly. Fortunately, if the bondholders stand firm, we’re likely to see that process begin on Monday.