When Failure Got a Promotion

GM accepted a total of $50 Billion in bailout money before going bankrupt. I remember times in my youth (i.e. anytime prior to 2008) when this was still considered a large amount of money. GM promised that with some operating income to hold it over for a few months it would be able to avoid bankruptcy. This, according to GM, would enable it to protect its bondholders, shareholders, and other stakeholders such as the UAW from a detrimental bankruptcy filing.

This is an interesting case to watch considering the future implications it will have. For instance, which stakeholders, at least according to this administration, take precedence over the others? As it looks now the answer to that question is clear, the UAW. Bondholders and equity shareholders are left to feed off the scraps of a company driven into the ground by poor management and the very organization set to run the “new GM”. Despite the fact that GM owed the bondholders roughly 35% more than the UAW, bondholders are only getting a 10% stake in the company. Via a new employee benefit plan, the UAW has already received $2.5 Billion in stimulus money, will receive another $6.5 Billion in preferred shares, and an astounding 17.5% stake in the new company. The only shareholder with a larger stake is the US taxpayer, with roughly 60%.

This is a very scary precedent. The nationalization of GM has shown the emphasis on contractual law that, in the past, was used to dictate who received compensation in the case of a bankruptcy, has been thrown out the window. It has been replaced by a system of government bureaucracy, wasted taxpayer dollars, and personal preferences. Upon taking control of GM, the government immediately fired the CEO, a person that could be considered largely to blame for the company’s woes. The other party responsible for GM’s downfall, the UAW, got a promotion. The lack of public or media outrage is chilling. If GM was a litmus test for how the public would react to a Chavez style takeover on US soil, I would say the government passed with flying colors.

The government wanted to help “protect GM from bankruptcy” to safeguard their brand image. GM stated that consumers would not have wanted to buy a GM product if the company went through bankruptcy. US consumers have not quit flying United after their bankruptcy, and in fact are getting accustomed to large companies going bankrupt. Therefore, if GM filed a traditional Chapter 11 would their sales suffer? Maybe a little. Will GM's sales suffer after the government sank 50 Billion taxpayer dollars into them, trampled on bondholder rights, fired the CEO, and handed over the controlling (non public) stake to the union responsible for the company's failure? Absolutely.