General Motors, one of America’s largest, longest lived companies has declared bankruptcy. With around $170 billion in debt and only $82 billion in assets, the weight was just too much, leading to the fourth largest bankruptcy in US history.
The government plan, carefully orchestrated, is to bring them slowly out of bankruptcy after being purchased by a new entity that will be 60 percent U.S. government owned, with a 12.5 percent stake by the Canadian government, a 17.5 stake owned by the United Auto Workers union, and the bondholders getting a 10 percent stake.
In short the problems with this range from the union’s ownership stake being controlled by its pension fund that doesn’t have the right incentives to care about properly running the firm today, to bondholders getting shafted in a rejection of the traditional senior vs. subordinated debt structure that typically guides bankruptcy proceedings. There certainly has been a lot of political posturing from the administration in the background of this, possibly strong arming some the debt holders who have been bailed out into accept the deal.
Two things to watch: will the bankruptcy judge/bondholders go along with the White House plan (all has not gone according to the script with Chrysler), and what will happen to Ford. A long standing argument has been that Chrysler and GM going bankrupt would cripple Ford as well because of the hit to suppliers. This was the argument for trying to bail them out six months ago. Since then Ford has been managing well and getting back on its feet. What will their outcome be?
In any event, we will likely see Government Motors emerge soon. How long will the taxpayers own a car company? Who knows, but I certainly am looking forward to the perks of owning my own auto manufacturer. I get a free car right?
Check out the Wall Street Journal op-ed today from former Romanian “Car Czar” Ion Mihai Pacepa. He writes about the Romanian program to develop the Oltcit car:
“Ceausescu micromanaged Oltcit, but he didn’t even know how to drive a car, much less run a car industry. To save the foreign currency he coveted, he decreed that the components for the Oltcit were to be manufactured at 166 existing Romanian factories. Coordinating 166 plants to have them deliver all the parts on time would be a monumental job even for an experienced car producer. It proved impossible for the Romanian bureaucracy, which pretended to work and was paid accordingly. The Oltcit factory could produce only 1% to 1.5% of its intended capacity owing to the lack of the parts that those 166 companies were supposed to furnish simultaneously. The Oltcit project lost billions.”