Investors Betrayed by GM and Obama
Last week General Motors went public. General Motors has been resurrected by a taxpayer bailout. When the company sought bankrupty protection, the US government bought the company through an infusion of $49.5 billion in cash. The company was restructured, closing Pontiac and Saturn lines and a number of dealerships. Investor shares were converted to Motors Liquidation Co (MTLQQ).
Next we saw the “cash for clunkers” program that destroyed many used cars, priming the market for more new car sales. Next, we witnessed an unprecedented amount of prime-time advertising for General Motors cars—advertising paid for with your tax dollars. This was a government subsidy aimed at eliminating competition.
Rather than being a referee, the primary role of government in a legitimate economy, the government became a player, competing with its own citizens and throwing a rigged game in favor of General Motors—actually its union. On November 24, 2010, a record 20.1 billion shares was sold in a new public offering at around $35 per share.
What happened to those most faithful GM investors who had kept their money in the old GM? Their shares—which had been placed in MTLQQ—were worthless. Who received the new stock ahead of the IPO? The General Motors Trade Union and the U.S. Treasury. One despondent investor wrote:
I’m still holding GM stock that Obama DROVE DOWN from $35.00 to 28 cents or less ! My “old” stock is now worth NOTHING ! Having purchased GM vehicles for most of my lifetime for most in my family, I can tell you I will NEVER purchase another General Motors product and will continue to advise everyone I know to avoid ‘enriching’ GM and their “Thug” Union any further. I wish Obama and his socialist supporters the absolute worst that could possibly befall them.—Response to Washington Times article
While the government lending money to private companies is generally unprincipled, the General Motors bailout was radically different from the Chrysler bailout in 1980. In 1980, under President Jimmy Carter, the government co-signed a note for $1.5 billion (a government guarantee on private loans) on the condition that Chrysler essentially restructure in a way that provided an additional $2 billion in commitments or concessions. In that deal, investors kept their shares, the government did not shell out taxpayer money (although it was on the hook), and unions and management made the largest concessions. When Chrysler recovered, faithful investor shares recovered as well. In the GM case the loyal investors were left out in the cold.
The real loser in the General Motors deal is the legitimacy of the economic system in the United States. Although there were large profits to be made from the launch of the new GM IPO, a precedent has been set whereby a government administration can confiscate the ownership of a company, reorganize it, and pay off its political supporters. The former investors were betrayed by political decree, and once betrayed, the legitimacy of the system will never be the same.
There is also no real proof that General Motors is competitive. On opening day, the government and the GM union each sold one-third of their shares. Their income came from investor speculation, much backed by American 401k plans invested in huge funds. The income did not come from profits. The systemic costs of production related to union wages and retirement plans have not been addressed, and unlike Chrysler—and more like the Russian Lada prior to 1989—a precedent was set for future bailout needs because long-term economic stability was sacrificed for immediate union concerns. And, it is expected that taxpayers will be left permanently on the hook for up to 50% of the present bailout.
In the final analysis, the American system must be reformed so that private investors take all the economic risks and government only plays the role of referee, keeping people from harming one another in by an unprincipled pursuit of happiness. In this case, the government itself became a player and was party to a theft from taxpayers and original investors. In Life, Liberty, and the Pursuit of Happiness, Version 4.0, I indicated that a constitutional amendment parallel to the separation of church and state should be passed related to the separation of economy and state. It would go like this, “government should not establish any business, or prevent the free exercise thereof.”
Of course, government’s primary role is to intervene when people steal, kill, or harm one another. This includes harm done in the name of religion or in the name of business. We are learning to intervene for example, in the sexual abuse of boys by priests, and this is as it should be. However, the GM bailout is in some ways analogous to judges joining the union and engaging in the financial abuse of investors. We need to learn from the lessons of history the necessary checks and balances that need to be put into place for the long-term stability of the society.
there are several aspects of this essay that are incomplete to the point of being misleading and contradictory. GM was broke before Obama took office, which is why the Bush Admin “loaned” it $13 Billion and ordered it to come up with a restructuring plan by March 2009. When it finally filed for chapter 11 in June, GM’s liabilities were about $100 Billion more than its assets. It needed a drastic restructuring, and had narrowly avoided chapter 11 in previous years. In Chapter 11, the creditors get to fight over the remaining assets before the stockholders. Stockholders are not creditors, but owners of the company that was $100 Billion in the red. With that much debt there is not much chance for stockholders to get any of the remaining assets. Obama did not drive the stock down. That was done by the formerly “loyal” investors who saw the writing on the wall and sold their stock. The stock was selling at $36 in Nov. 2007, a year before Obama was elected, and was below $6 in Nov. 2008.
The entities that were part of the restructuring were the major creditors that had legitimate claims on the remaining assets. This did not include the UAW but a trust fund for UAW retirees, which was owed Billions by GM. Union workers did make wage and retirement concessions in the restructuring, as well as in previous financial crises for GM. The role of the federal government in the restructuring was unusual but arguably justified given the severity of the financial collapse and recession, which is by many measures the worst since the Great Depression of the 1930s. The Great Depression was eventually ended by an active role of the Federal Government, that did not lead to socialism. Alan Mulally, current CEO of Ford, which did not receive government support, was nonetheless supportive of the government assistance to GM and Chrysler because a total shut down of GM and Chrysler would cause major disruptions for the supply chain that Ford depends on.
Gordon and Greg; here we are again trying ti stomp out a brush fire while back at the ranch the bad guys are burning down the barn, bunkhouse, and the Casa Grande.
Take a fresh think and a deep breath. Where did this bailout money come from? Thats right we borrowed it from the FED. Then we bailed out member banks of the FED; Then we bail out GM, GMAC, and Chrysler. And don’t forget Cash For Clunkers, all these destructive ideas.
How on earth can we justify Borrowing from the FED to give back to FED member institutions?
I’m sorry that Im such a dunce but I just dont get it. How on earth did we think that would ever work out inthe first place.
Help me better understand this kind of reasoning please.
Greg and Charles, The idea of bankruptcy laws and the repayment of creditors is a good one. However, in this case the bankruptcy only took place for the investors and managers, it was not a bankruptcy for those receiving a pension. You will note from my article on rethinking government pensions, that I advocated a system by which pensions are better guaranteed–annuities. I believe it is morally wrong for a company, or a government, to promise future pension money that is dependent on continued corporate growth or population growth, or investment in stock markets. The only non-speculative method of pension guarantees is to contribute into a pool that is actuarially regulated so that payments are guaranteed to come out of collected contributions. Any other type of pension fund or form of social security will likely suffer bubbles and crashes.
Thus the immoral component of the GM bankruptcy proceedings, in my mind, was the idea that GM pension funds were secure entitlements, and that pensioners were more valuable as people than business creditors or stock investors. In a world that treats all people as equal in the eyes of God, the suffering from a bankruptcy should apply to everyone as equally as possible. Stock investors in GM put money they earned from other jobs in GM, GM employees put faith in their retirement in GM also. If investors lost their pensions 100% yet GM retirees were given theirs in the new stock offering, then you have created a form of theft from one group against the other. Take the remote case that an individual had all their retirement funds in GM stock, that person will not have social security as their only income. On the other hand, the GM employee will get much more retirement income. However, if the GM retirees lost their pensions completely and everything went back to stockholders, then they would be left with only social security. Thus to be fair, all stakeholders should suffer more equally, so that everyone gets something over social security.
It would have been more fair to have a new stock offering in which everyone was in it together and suffered as equally as possible. Thus, former shareholders should have kept shares as in the case of the Chrysler bailout, or the company should have been totally liquidated. What happened is that some capital was retained and given to a new group. This constitutes a form of theft.
However, as I already mentioned, this type of corporate pension fund ought to either be illegal, or be treated as having the risk of a stock market investment–especially since pension funds are put in the stock market. It is a major mistake for a government agency or a court to call a speculative investment by one party an entitlement, an a speculative investment by another party as disposable. This is a form of arbitrary patronage.
As for the involvement of the Fed. The problem with the Fed is that it receives interest on such bailouts. The banks actually lending the money should not be the Fed itself. As a government institution, the Fed ought to be a central source of money supply that doesn’t earn money on usury or the hardships of American citizens, but supplies money to individual banks that put themselves at risk in exchange for interest. If no consortium of banks would be willing to take on the risk of GM, then it should have been liquidated. If it was sufficiently restructured to be saved from bankruptcy, I assume banks would sign on, and original investors, even if their shares were worth 1 cent each, should have been entitled to be part of the revival.
You never mentioned the GM bondholders who lost everything.. FIRST TIME IN THE HISTORY OF THE USA THE PROMISE TO BONDHOLDERS HAPPOENED. OBAMA WAS OWNER OF GM WHEN IT CAME OUT OF BANKRUPTCY 90 DAYS LATER. Obama took the funds that the bonds brought in and repaid the Loan he made from the UAW union to pay for his campaign. That was planned before the election. The bond holders were mainly retired folks and small pension plans –small towns. Years later I received a very few shares of common stock in GM for my $50,000.00 that they took from me and Obama paid off his personal loan with. GNM stock today pays very little if any dividends. Theft by
On other forums I discovered I was dumb as a rock and should not have invested in GM in the first place, because I didn’t know the rules. It has been fascinating reading. Can someone boil it down to a few sentences for us rocks? I.E., (1.) we’re screwed; (2.) Obama’s Union friends are protected? Is there not room for class action in this action? I am assuming the different classes of stock are what protected the unions, but what right did Obama have to give the company to the unions while we lost everything?
Larry, I think you hit on an important point. Stock investing needs simple, clear, rules that investors can understand, and a level playing field that provides equal opportunity. Not only have special interests made the rules more complex and difficult for average investors over the years, but in this case government power changes the rules in the middle of the game.
This undermined the legitimacy of rule of law. The average person doesn’t have a chance under such circumstances, so such changes force the average person to rely on mutual fund investors that try to second guess what will happen.
You asked what “right” did Obama have. One point of my article was did indicate that he did not have a moral right, but acted unilaterally like a king, not following principles of law that allowed such economic institutions to develop.
My guess is that he was returning a favor to union lobbyists that contributed to his election, while relatively clueless that he was undermining the larger system he took an oath to uphold.
Obama drove the stock down from $35? He was not in office until 2009. It was under $2.
He probably had corporate raider friends who did it for him. Obama’s Fascist underpants were showing when he pulled that heist.