Model corruption: The truth about the GM ‘rescue’


General Motors plans an initial public offering as soon as today — a first step in the government’s effort to sell its ownership stake to private investors. The IPO comes on the heels of a much publicized plant tour by President Obama, who’ll certainly hail the stock sale as proof he made a smart decision by bailing out the automaker with billions of taxpayer dollars.

But, to us, the IPO will be proof of something else: a White House that purposefully trampled the legal rights of investors — many of whom, like us, are small savers — to benefit its political supporters. Rather than a model of success and foresight, the GM episode is a model of corruption and cronyism.

Steering to favor his friends: President Obama, here getting behind the wheel of a Chevy Volt at a Michigan auto plant last month, led a government takeover of GM that vastly benefited his labor-union allies.

Let’s review the sordid history. Last year, the federal government bought a majority stake in GM for about $50 billion — a sum equal to GM’s market capitalization in 2000, when it was making record profits.

It should hardly be a surprise that the new GM, with so much money to work with (plus a special $16 billion tax benefit) would start inching into the black again. After all, Ford, without government help, has posted after-tax earnings of about $4.7 billion for the first half of this year — more than twice GM’s, even with the $1.3 billion second-quarter profit that “Government Motors” announced yesterday.

The bailout’s announced goals required a more limited intervention than what Washington concocted. For example, a deal could have been brokered with strategic investors, as in a normal distressed sale, with GM’s assets — including its valuable Cadillac and Chevrolet brands and an expanding foothold in China — passing from weak hands to strong.

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Bumper stickers, t-shirts, magnets for Tea Party Teabaggers!

But the fact that the administration mainly solicited advice from bankruptcy experts, rather than those in industry, is evidence that alternative solutions weren’t considered.

Instead, politicians ran the company their way — raining taxpayer money on key electoral states like Michigan and rewarding their staunch financial backers in the United Auto Workers union.

The devil, in this case, was in the details of the bankruptcy plan that the government pushed through:

Bondholders — investors ranging from large institutions to retirees just scraping by, who loaned GM a total of $27 billion — received just 10 percent of the company. By contrast, the government’s $50 billion gave it about 61 percent.

And the union — in return for the $20 billion that GM owed its health trust — got a remarkable 17.5 percent of the stock plus $2.5 billion in cash plus $6.5 billion in preferred stock carrying a dividend of about 9 percent.

In other words, the UAW got three to four times as much as the bondholders for a smaller claim on GM’s assets. The union even boasted to its members in May 2009 that it had made no concessions on pay, health care or pensions in the restructuring.

In effect, the government divided up GM’s creditors into favored and unfavored groups, then gave a fat stake in the reorganized business to the favored (a k a longtime Democratic Party donors). On top of that, Washington also ordered the shutdown of 1,650 GM dealers and another 1,000 Chrysler dealers as part of its takeover.

In last month’s audit, TARP’s inspector general criticized the Treasury Department for that very decision. Treasury didn’t show why the cuts were “either necessary for the sake of the companies’ economic survival or prudent for the sake of the nation’s economic recovery.” The move “substantially contributed to the accelerated shuttering of thousands of small businesses.”

Remember this as the president brags about recent gains in auto-industry jobs: Even though some plants have added union jobs, many in the dealerships have been lost.

But our main concern is what happens going forward. A terrible precedent has been set.

Small bondholders are essential to funding US industry. How eager will they be to invest their savings after seeing how the administration misappropriated the federal government’s vast power and ignored long-standing bankruptcy law to reward its supporters at the expense of the less powerful?

We’re pleased that GM is making a profit and, with the IPO, taxpayers should get some of our money back. But the government takeover of GM absolutely should not be framed as a success or, worse, as a model for the future. It was political bullying at its worst — an arbitrary action befitting a banana republic, and deeply unfair to small investors who expected their lawmakers to play by the rules.

Mark Modica was a business manager at a now-closed Saturn dealership in Chalfont, Pa.; Hal John is an executive-search consul tant in Chesterfield, Mo. Both were steering committee members of Main Street Bondholders, a coali tion of small GM investors.

Investigate this

Last week General Motors chairman and chief executive officer Edward Whitacre took to the pages of the Wall Street Journal to make an important announcement: “The GM bailout: Paid back in full.”. Whitacre asserted that GM had paid back all the funds it borrowed from the United States in full with interest.

Whitacre omitted two facts that rendered his column highly misleading. They are the kind of omissions that constitute securities fraud when made by a company in connection with the purchase or sale of a security or when a company reports its financial results.

If any investor bought GM shares based on Whitacre’s column, it appears to me that the investor would have a good claim against GM. The SEC would in any event be warranted in taking a look at Whitacre’s shenanigans on behalf of the company.

First, Whitacre omitted any mention of the remaining $50 billion or so that the government has sunk in the company’s equity. Second, Whitacre omitted any mention of the source of the funds with which GM “repaid” the loan. According to TARP Special Inspector General Neil Barofsky, the source of the funds in whole or in substantial part was the United States government TARP program, not GM earnings. Shikha Dalmia has much more detail on the misrepresentations permeating Whitacre’s public relations blitz in this Forbes column.

Whitacre’s Wall Street Journal column was, in short, a fraud. But it was a fraud of a special kind. It was a fraud committed with the assistance if not the urging of the Obama administration. It was not, in short, the kind of fraud that Michigan Senator Carl Levin or his Democratic counterparts chairing other Senate committees will be holding hearings on any time soon.

I assume that Whitacre got paid by the Wall Street Journal for his fraudulent column and that the funds were paid over to General Motors. The GM advertisement below commits the same fraud as Whitacre committed in his Journal column, but this one is committed by Whitacre at GM’s expense, underwritten by taxpayers. Someone in a position of authority really ought to investigate this.

August 14, 2010 | Comments »

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