General Motors' IPO: Deal Or No Deal?

Classic Cadillac.jpg

Those who are looking for a feel-good stimulus story, notably members of the Obama administration, cite the recent initial public offering (IPO) in which the federal government sold off 28 percent of its General Motors shares for about $15 billion.

When the government-owned shares went public, President Obama said: “American taxpayers are now positioned to recover more than my administration invested in GM.” From the headlines and sound bites, you might think that the government was in the money on the $49 billion that the Troubled Asset Relief Program invested in GM during the dark days of the Great Recession.

To believe that the U.S. government made money on its GM investment is to imagine that former republics of Yugoslavia will get back together so that they can restart the production lines of the Yugo.

In the GM story, there have been many winners and losers on the road from bankruptcy to IPO. For the most part, the losers include investors, bondholders, taxpayers, and the 65,000 workers laid off so that, in the showroom of American politics, the bailout money could look like a rebate.

The winner was the United Auto Workers union, which delivered Ohio and Michigan to the Obama campaign in the 2008 election. Without the union's support in 2012, the president’s handling and maneuvering ability in the electoral college might resemble the torque on a Chevy Vega.

The GM that went bankrupt in 2008 was not just a car company; it was also an unfunded pension plan, a bad bank (partial ownership of General Motors Acceptance Corporation or GMAC), and a health maintenance organization notable for padded bills.

As it hit the crash wall, GM had negative equity, $88 billion in losses since 2004, 92,000 workers, 500,000 retirees, and 22% of a domestic car market that had shrunk to 13 million cars a year.

What sleight of an accountant’s hand turned the originator of the Chevy Nova into an emerging juggernaut (maybe one with “soft Corinthian leather?”) that the market now values at $51 billion?

Instead of letting GM go through Chapter 11 liquidation, and winding up the company according to bankruptcy laws, the U.S. government stepped in and allocated the spoils according to political rather than legal precedents. In theory, the move was designed to “protect American jobs.” What did these jobs cost?

The immediate losers were GM shareholders (largely wiped out), and the holders of $95 billion in corporate bonds, now worth about $0.30 on the dollar.

If you check the price of GM shares today, you will see them trading at around $34 a share. “Not bad,” I can hear you saying, recalling GM at $22 or even $8. But these are the new Government Motors shares; the old ones, which your grandfather owned, are trading for less than $1 on penny stock exchanges. Maybe the certificates are selling at flea markets?

In the restructuring, the new owners of GM became the U.S. (61%) and Canadian (12%) governments, and the United Auto Workers (17.5 %), whose generous health and retirement packages would have been watered down or lost in a commercial liquidation.

In the bankruptcy, the UAW retirees were moved ahead of the bondholders to the front of the disassembly line, no doubt because their rust-belt votes count more in presidential elections than those of bi-coastal hedge funders.

Stakes in the new GM were granted to the union in lieu of cash due on health care and other benefits, which survived the reorganization. In the recent IPO, the unions netted $3.4 billion for a third of their stake.

Other options thrown into the car deal included the $17 billion given to GMAC, whose losses became a ward of the state, and whose profits go to the hedge fund, Cerberus. It’s been renamed Ally Bank, just so you won’t associate its bad debts with the GM bailout. (“Test drive the new Ally... from zero to $17 billion in six point four seconds.”)

GM was also allowed to carry forward $45 billion in Net Operating Losses through bankruptcy, a deduction rarely, if ever, granted to other scrapped companies. Clunkers for cash? The company also got a $6.7 billion loan, at below market rates.

And finally, to promote Chevy Volts, buyers of the new hybrid electric car are given $7500 in federal tax credits. Maybe Ford dealers can match the subsidy on their hybrids by throwing in a set of snow tires?

The new GM is allowed to operate with an unfunded pension liability, which remains on the books to the tune of about $30 billion. Mark that claim to market (those accounting rules that did so much to collapse the likes of Merrill Lynch), and GM’s IPO stake is hardly worth $15 billion.

The contrived GM liquidation also kept the auto maker from dumping about $14 billion in promises onto the Pension Benefit Guaranty Corporation, a nominally private company — the board, however, consists of the secretaries of Labor, Commerce, and Treasury — that, with government benedictions, backs up politically correct pension payments.

There is almost no way to know the total losses that can be attributed to the government’s GM restructuring. But, clearly, the government played Three-card Monte with the company’s bad assets, and kept the good ones for themselves. On Wall Street — the object of so much government venom — this is called “asset stripping.”

Little wonder that everyone, including its government shareholders, are now upbeat about GM’s prospects. Morningstar writes: “GM can break even at near-depression-like sales volume, and it is selling more units in the U.S. with four brands than old GM did with eight brands in 2009.”

At the time of GM’s IPO, President Obama sounded like Mr. Goodwrench: "Just two years ago, this seemed impossible. In fact, there were plenty of doubters and naysayers who said it couldn't be done, who were prepared to throw in the towel and read the American auto industry last rites.”

What he might have said is this: “We hosed the shareholders and suckered the bondholders down to $0.30 on the dollar. We propped up GMAC with $17.5 billion and then buried the losses in bad bank accounting. We leaned on the accountants to keep $45 billion in Net Operating Losses. We learned something from Bernie Madoff and are letting GM continue to carry $30 billion in unfunded pension liabilities. We dumped GM’s health care obligations, for shares, into a union trust. The rest we moved off the lot. Home run.”

The government originally threw $49 billion at GM’s cash guzzling problems and then forced another $100 billion on the market in losses. In exchange thus far, it has recouped $15 billion, for about half of it stake in the new GM.

In Washington, that might pass for a good deal. It might also seem fair in a remake of The Godfather (“The Corleone Family wants to buy me out? No, I buy you out, you don't buy me out.”) Elsewhere, it sounds like a lemon.

Photo of Classic Cadillac 2 by Shiny Things: "For-sale Cadillac parked in Morro Bay. How tempting is that?"

Matthew Stevenson is the author of Remembering the Twentieth Century Limited, a collection of historical essays. He is also editor of Rules of the Game: The Best Sports Writing from Harper's Magazine. He lives in Switzerland.



















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We can all see that the auto

We can all see that the auto industry doesn't look too good at the moment but I am expecting to see it revive any moment now. Those voucher programs sure helped. I would have benefited from one myself if I hadn't put my car on a car donations list, maybe it's for the best, owning a car today is not as accessible as it used to be and besides I like my new green lifestyle.

Supporting the "Bailout"

I don't find this a very illuminating article. True, there were winners and losers in the GM bankruptcy. The only difference here is that the workers, according to the author, were paid off for their votes. If we assume that's true, so what? We're supposed to have a democracy, so if the votes of many workers count for more than the votes of fewer bondholders, so be it.

I think this episode is going to go down as Obama's biggest success in his first term. If GM had gone down, it might have destroyed the entire domestic auto industry, including foreign owned transplants because the supplier network would have collapsed. The author seems to think it would have been better to go through some kind of regular bankruptcy process than a pre-packaged government-backed process. I can't see how this is supported by facts. It's true that there is a lot of pain in this restructuring and many plants (and towns) in the "Old GM" are left to be picked over by scavengers while the "New GM" moves on as a newly lightweight corporation. What was the other option? I'd wager that more was saved by government intervention than would have been the case in the "free market."

I'm going to have to agree

I'm going to have to agree with Rick Harrison below: The cars and trucks GM and Ford offers today are for the most part highly competitive- and in some cases better- than those produced by even Toyota.

I'm a lifelong Toyota owner. Growing up in the early 80's, my Mother had an early 85' Toyota Camry. Compared to the clunker Buick Riviera and Oldsmobile Delta 88 we had owned previously, the quality was noticeably higher. Everything on the Camry was thoughtfully produced right down to the knobs on the radio that gave a satisfying crisp "click" when pressed. Every car we've owned from Toyota lasts at least 200,000 miles and even then we generally get bored of the car and trade it in.

But honestly, some of the cars like the Ford Fiesta, the Chevy Cruze, and the newer Taurus and Explorer are all attractive, desirable vehicles in my book. I used to NEVER have even a passing interest in anything the Big 3 produced because to me, almost all of what was offered from them was plasticy, awful, and crudely executed. These days I would have no problem buying any of the above cars listed above.

On top of that, for the first time in who knows how long, GM actually created a product that is highly disruptive and genuinely ingenious- the Chevy Volt. No other car company has anything else like it on the market. Despite the higher price the car is selling well. I applaud them for this not only for the product, but for turning their company philosophy from relying too heavily on larger SUVs and trucks to one that is more perceptive to future needs and innovation.

GM, Ford and other troubles companies

I think GM, Ford and other troubles companies should get to the new era after the 2009 catastrophe, with new way of thinking and new administration tactics to improve the companies situation in the market.

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GM will be in bankruptcy court someday

GM will be in bankruptcy court someday. It should have been there in 2008. The can was merely kicked down the road (again).

GM will be back again with its hand out for another bailout.

You can count on it.

I hope we can say no when that happens and allow the bankruptcy court to do its job. A broken up GM would be far better then trying to keep this mess together. Maybe more of the brands could have been "saved" had they done that this time by making them separate companies!

The remaining assets are probably more valuable in the hands of real businesspeople. The allowing of the people who ran it out of business and government types that have no idea on how to run a business to run it are the worst of this mess.

Growing up in Detroit

First, I'm a great fan of General Motors - I drive a new CTS-V, one of the most amazing cars ever for the price - it takes balls for an Auto maker to produce a Cadillac that can go faster than most private airplanes (191 MPH) yet can be driven daily by your grandmother, for the price of a SUV.

Growing up in Detroit, people strived to work for the auto companies. A career (lifetime) of installing windshield wiper motors for the promise of a great retirement and benefits with pretty good pay along the way. In the 1960's Detroit was pretty much making crap. Stylish yes, powerful yes, but dangerous, rustworthy junk. Luckily the rest of the world (Mercedes excepted) made even worse rolling trash. Keep in mind that in the 1960's the Big Three might be able to support retirements because people simply had much shorter life spans, not so today!

Then that tiny Japan started making dependable cars that pretty much took Detroit by suprise. The (unionized) junk coming out of Detroit needed serious rethinking. The excessive brands needed to go a long time ago - but how, with unions controlling everything?

I think GM and Ford have done an amazing job these past few years and can compete with the world from a product basis. I have the first official Volt order in Minnesota, ordered before the current tax credit. I'm not sure I still want the car, not because of anything other than waiting a few more years for the technology to evolve more. A nearly 200 MPH Cadillac for less cost than a base (no option) Lexus LS? An electric car that can drive across the USA? That's American innovation at it's best!

How much did "unions" contribute to the innovations? To the quality? To the dependability? To the beautiful designs? I'd bet nothing - nada - zip - zero. I know that a century ago there was viable reasons for unions, but we are living in the 21st century, not the 19th century. We need a 21st century GM, Chrysler and Ford.

why dont you take a

why dont you take a temporary car insurance, and than see what you want to do.