Blogs & Comment

Introducing Government Motors

To hear some tell it, that General Motorswent into Chapter 11 bankruptcy yesterday was almost a normal event. Analysts spoke of it as such. The Dow Jones Industrial Averagebounced two hundred points in midday trading. And U.S. president Barack Obama‘s address to the nation made brilliant political capital out of the news that Chrysler‘s bankruptcy judge had just approved that company’s deal with Fiatthus smoothing the way for Chrysler to emerge from bankruptcy in record time. (See my colleague Tom Watson‘s blog DoubleSpeakfor more in-depth and entertaining coverage of said deal.)
Obama took pains to imply that Chrysler’s bankruptcy provided a clear road map with which the United States could tackle GM’s version with supposedly smooth results. Under yesterday’s terms, the United States federal government now owns 60% of the company. The governments of Canada and Ontario are to own roughly 12%, and have pitched in $10.5 billion to ensure GM Canadacontinues operations without going into CCAA, Canada’s version of Chapter 11.
All of this raises significant questions that I’ll get to in a minute. But on balance, the ho-hum reaction to GM’s news isn’t so surprising.
Firstly, this was not, shall we say, an unexpected event. A Wall Street lawyer with knowledge of the proceedings confirmed on Tuesday last week that GM’s bankruptcy was already in the works, and a Paul Weisslawyer I’d spoken with in midtown on the Friday before the weekend was in fact convinced GM’s unsecured bondholders had already rejected the government’s terms. (He was wrong a group of unsecured bondholders voted 54% in favour of a sweetened government deal that offered them 9 cents on the dollar on Saturday. But then again, New York is currently lousy with underemployed lawyers, whose firms, rather like the governments that oversee them, are busy dreaming up creative social-enterprise schemes to keep them busy. Probably his mind was elsewhere.)
Secondly, the Obama administration’s late March decision to force former GM chief executive Rick Wagoner‘s retirement, combined with Chrysler’s controlled bankruptcy process and plenty of leaks from the administration’s media machine, indicated some kind of government-run bankruptcy has in fact been in the works for GM for months.
The President was at pains to stress yesterday that continuing to bail out the debt-burdened giant indefinitely was simply not an option; neither, given the automaker’s importance to the global economy, was an uncontrolled bankruptcy, a la Lehman Brothers. The solution? Rather than larding more debt onto GM’s balance sheet, the administration takes a 60% controlling stake in the company’s equity; a controlled bankruptcy ensures the company is split into good and bad parts (and that the company that emerges is viable and competitive). And we’re left with Government Motors.
There’s a fairly obvious US$30-billion-in-new-public-money-on-top-of-$20billion-already-promised problem with all this. It’s worth noting Treasury Secretary Timothy Geithnerwas in China last week, attempting to drum up more buyers for the ocean of T-bills required to finance his government’s financial commitmentsof which GM is only the latest. Small wonder markets for U.S. sovereign debt have been balking of late.
There’s also the gigantic gamble the government is taking, in assuming GM can emerge from bankruptcy a globally competitive car-selling machine. Make no mistake, Obama’s comments about being a “reluctant shareholder” aside, every major decision the company makes from this point onparticularly decisions around new plants, layoffs and the energy-efficiency of new carsis likely to be run through the mill of its political optics first.
Many worry publicly about what impact government-led attempts to meld a private company with other public goals will have on that company’s profitability. However, the blurring of mandates works both ways. As Maya MacGuineas , director of the fiscal policy program at the New America Foundationin Washington, D.C., points out, it’s now very much in the Obama administration’s interests for GM to succeed. “Failure to become profitable would imply failure of policy,” she says.
What’s more, MacGuineas points out, new energy taxes, plus the Waxman-Markey legislation on carbon emissions currently in the works in Congress, indicate any mandate for GM to produce, say, significantly more energy-efficient cars may actually help GM become profitable in the long-term. But we’ll see.
Of course, as with most heroic government efforts, what’s most interesting about yesterday’s announcements is what wasn’t said. For example, unlike our Prime Minister, Stephen Harper , Obama neglected to highlight that the government is likely to see little to no payback on its investmentat least in the short term.
Obama administration officials’ estimates for how long this process is likely to take are also likely overly optimistic, at 6 to 12 months. In a research note published yesterday, Barclays Capitalanalyst Brian Johnson estimated it will be more like 12 to 18 months. Johnson did however acknowledge that the government’s deal for bondholdersoffering 9 cents on the dollar, as opposed to the zero-to-five-cent deal floated earlier last weekwas better than expected.
“A significantly improved balance sheet, in our view, boosted potential recoveries for bondholders … and helped to win bondholder acceptance,” Johnson noted. “The potential capital structure of the new GM has $17 billion of debt and $9 billion of preferred stock (that is, $26 billion of liabilities and preferred stock) versus our prior assumption of $48.3 billion of liabilities.”
He acknowledged the terms of the offer continue to favor the United Auto Workersover unsecured bondholders, which, as was the case with Chrysler, reverses the traditional order of payouts. But in Johnson’s view, the offer for 10% of equity and warrants for an additional 15%, along with the improved capital structure, make for “an improved recovery for bondholders.” (It should be noted Barclays Capital is advising GM, and presumably hopes to do business with the future company; this will likely positively influence their analysis of the bankrutpcy.)
All of this leaves aside one of the more interesting long-term questions: How policymakers will tackle a government bailout over three jurisdictions, using three different pots of public money, while officials on the U.S. side continue to promote Buy American stimulus procurement policies designed to keep American jobs at home.
Presumably, the Canadian governments’ investments mean GM Canada will not face inordinate job losses or plant closures. However, as of press time the company has (wisely) made no such commitment. Its release simply states that the company “contemplates no further plant closures at this time.”
Hopefully, the investments do however mean added leverage for Canadian policymakers when it comes to renegotiating the idiocies of Buy American. And Maya MacGuineasof the New America Foundation certainly sees the three governments’ cross-border financing efforts as a positive when it comes to maintaining free trade.
“Greater fluidity at the border of goods and labour is critically important to economic recovery. In an economy like this, it’s so easy for countries to lose sight of that,” she says. “We’ve seen glimmerings of protectionism on both sides of the border. That these investments are happening across all three governments can only be a good thing.”
Let’s hope she’s right. Because judging from the near-total lack of traffic of any kind at the Peace Bridge border crossing near Buffalo yesterdaya crossing manned by newly-armed Canadian officials, where, for the first time ever, passports were required to enter Canada by land from the U.S.right now the cause of free trade could use all the help it can get.