With America’s biggest small-cap on the brink of becoming insolvent, Uncle Sam has been quick to step into the driver’s seat, forking over billions of dollars in bridge funding that could entitle the U.S. Treasury Department to as much as 70% of the company. That’s the equivalent today of 3.1 shares of General Motors for each American taxpayer today.

But don’t count your money just yet…

Right now, America’s biggest automaker is facing a shaky future. Today, management announced that talks had fallen through with the company’s bondholders. The bondholders were offered just 10% of the company in exchange for wiping out $27 billion of GM’s debts. They figure that they can do better in bankruptcy court…

It’s now become all but certain that the company that brought us the Hummer H2 and the 14/20 mpg Chevy Suburban will enter bankruptcy court on Monday.

A High Stakes Game

But as poetic as that punishment may seem to millions of fed up Americans, the stakes of a GM bankruptcy are as high as ever. At the end of last year the company employed 252,000 people, not to mention the millions of jobs at GM’s dealers and suppliers.

Those numbers have already been pared down through employee contract buy-outs and forced dealer closures, but the fact remains that the fallout from a GM bankruptcy will be hard-felt, especially in places like Michigan where the auto industry accounts for a huge chunk of the state’s economy.

It will also be tough on investors. After all, they’re the ones that’ll be left holding the bankruptcy bag next week as the world finds out exactly what’s in store for GM. While the company has lost 93% of its value in the last 12 months, the prospect that shareholders could be left with worthless shares makes the stock look expensive still at the $1.22 it’s currently trading at.

Even company employees have lost faith – the GM Employee Stock Fund sold off all of its shares in the company back in April when the stock traded at $1.69.

Certainty for GM

But while much still remains uncertain about the company’s future, some things are still not up for debate. First on that list is GM’s future as a functioning company – like the banks before it, General Motors has been deemed a firm that’s too big to fail. According to the New York Times, “…the government will provide G.M. at least $50 billion to get the company through Chapter 11.”

It’s that payment and others that means “We, the Taxpayers” will get 3.1 shares GM common stock each after the company’s restructuring is complete. Don’t worry, our friends at the Treasury will take care of them for us.

Another certainty is the fact that state ownership of GM will bring about some interesting changes for the automaker. President Obama proved to be an activist shareholder in GM long ago, when he fired then CEO Rick Wagoner and directed the company to convert their debt to stock as part of the restructuring plan. Why shouldn’t we expect the same level of interest when it comes to car models and miles per gallon?

We’ll see how things pan out next week when GM announces its final restructuring plans to the country. Let’s hope we don’t get taken for a ride this time.

Cheers,
Jonas Elmerraji

May 27, 2009

Time to Collect Your 3.1 Shares of GM was originally featured in the Penny Sleuth.

The key point is that the framers of the U.S. Constitution specifically anticipated that the nation would encounter economic troubles from time to time. So they gave Congress the power to enact bankruptcy laws, as opposed to “bailout” laws. And throughout U.S. history, the various economic “Panics” — which occurred every couple of decades — always led to one direction or another in the evolution of state and federal bankruptcy laws. Hey, bankruptcy works. (Full disclosure — I used to practice bankruptcy law.)

At some times in U.S. history, the bankruptcy laws favored the creditor class. During other times, the bankruptcy laws favored debtors. The point is that the economic hardships were eventually manifested in bankruptcy proceedings.

Just as all rivers flow to the sea, bad debt must find its way to discharge. So bankruptcy court was where judges and attorneys and other financial experts (like accountants and actuaries) could deal with each case on the merits. The problems could come to some sort of resolution. Some people came out OK. Other people lost everything. But capital flowed from weak hands to strong hands, and the economy moved along.

Why Not Bankruptcy Process?

But not today. Why are the politicians so eager to avoid seeing companies go into bankruptcy? The government is trying to solve the problems of gargantuan levels of debt — along with chronic insolvency and illiquidity within the economy — without resorting to the constitutional-based legal mechanisms and tools that have served the nation well for over 200 years.

Sure, bankruptcy cases take time to roll through the courts. But could Chapter 11 bankruptcy be any worse than the current drip-drip-drip, hemorrhage of funds into the black hole of the likes of AIG? And at least some bankruptcy judge might just put a stop to the AIG exploits of taking nice vacations to exotic resort locales.

Or what about the U.S. automobile industry? Now the domestic car-makers want some of that TARP money too. Or else what? They’ll have to file for Chapter 11? Yeah? And then?

Well on the day that the automakers file for bankruptcy, the automobile factories will still be there. The patents and designs aren’t going anywhere. The workers and design teams will stick around for a while — it’s not like there are a whole lot of other jobs out there.

It seems to me that General Motors, Ford or Chrysler — without the legacy costs of pensions and health care and featherbed contracts for non-working union members — would actually be a decent investment for a Debtor-in-Possession (DIP) form of financing. Any DIP-lender worth its salt would certainly go into the management suites to take names and get rid of the deadwood. And over the long term, if U.S. automakers actually paid more for steel than they have to pay for retiree health care, then we might actually see a revival of that industry.

Meanwhile, We’re Losing Time

Meanwhile, we are losing time. The world’s central bankers and treasury ministers dither, and squander capital into bottomless pits of a deflationary recession.

But the great villain in all of this is debt, pure and simple. And much debt is just a collection of bizarre debt instruments, exotic forms of speculative contracts, and obligations so massive that they will never be repaid. So why prolong the agony? Liquidate it now. Let the bankruptcy courts do what the framers intended.

Until we meet again,
Byron W. King
November 21, 2008

The Bailout Clause of the U.S. Constitution was originally featured in the Penny Sleuth.