Feds Told GM To Drop Pontiac Or No Bailout, Lutz Says

[jpd80]

Anyone who invested in GM stock or continued to hold it even 3 years prior to 2008 and thought "Eh, it'll be fine" was delusional.

Or were stock holders expecting the government to bail out GM and by extension, them as well

[akirby]

Or were stock holders expecting the government to bail out GM and by extension, them as well

 

This. They could have given the old shareholders stock in the new GM stock. They could have simply given GM a regular loan and left the stock as is. It's the same freakin' company it was before making the same vehicles, just slimmed down a little bit.

 

They should have been allowed to keep their shares of GM and benefited from the rebound. They were not and they got screwed.

[grbeck]

Or were stock holders expecting the government to bail out GM and by extension, them as well

They are probably wondering why they didn't get the same treatment as the UAW.

[RichardJensen]

They are probably wondering why they didn't get the same treatment as the UAW.

 

Why would they wonder that? The government doesn't insure stockholders against losses.

[akirby]

The government doesn't usually take stock ownership in private companies either. The old shareholders should have been given shares in the new company.

[RichardJensen]

The government doesn't usually take stock ownership in private companies either. The old shareholders should have been given shares in the new company.

 

Two problems with this:

 

1) GM was insolvent. Their liabilities were far in excess of their assets. Under any conventional chapter 11 or chapter 7 action, stockholders would have minimal expectation of receiving equity in any successor organization, or any cash payment on liquidation.

 

2) Treasury's responsibility under TARP was to minimize taxpayer cost. Awarding equity to existing stockholders at the expense of taxpayers would be poor stewardship of TARP funds.

 

The bottom line: Caveat emptor.

 

Stock and bondholders expected to be made whole by the government. If this were a smaller bankruptcy that would be handled in a conventional manner, bond & stock valuations would have plummeted as buyers correctly judged the odds of recovery as minimal.

 

But these investors thought that things would be different. They weren't. Treasury did what any bank would do. It looked after its own interests ahead of just about everyone else.

 

As I said, one can question the ethics of the Delphi deal, wherein Treasury assumed responsibility for the UNION pensions of an unrelated entity, but one cannot question the overall bailout of the pensions on grounds that taxpayer interests were not served.

[BrewfanGRB]

Or were stock holders expecting the government to bail out GM and by extension, them as well

Then they were stupid. It still cones back around to: If feds don't bail out GM, shareholders aren't in any different position. They're just pissed a bankrupt company got bailed out and their should-be-worthless-stock was still worthless.

[akirby]

Why couldn't they have simply given GM a loan and left the stock alone. GM would have still rebounded. The old stockholders would have some value and GM could be paying back the loan in full over the next few years.

 

This is exactly what Ford did - they just managed to do it on their own without Government assistance. And they didn't screw the stockholders or the taxpayers.

[RichardJensen]

Why couldn't they have simply given GM a loan and left the stock alone.

 

What could GM secure it with? They were insolvent.

[akirby]

 

What could GM secure it with? They were insolvent.

 

The Government money was unsecured anyway - the stock would have been worthless if GM went under.

[grbeck]

 

Why would they wonder that? The government doesn't insure stockholders against losses.

The federal government also doesn't normally ensure that union contracts emerge from a bankruptcy proceeding largely unscathed, but that is what happened. So one can hardly blame the stockholders for expecting a similar deal.

[grbeck]

Then they were stupid. It still cones back around to: If feds don't bail out GM, shareholders aren't in any different position. They're just pissed a bankrupt company got bailed out and their should-be-worthless-stock was still worthless.

If you see other parties in a bankruptcy proceeding receiving special treatment, it's not unreasonable to expect special treatment for yourself.

[RichardJensen]

 

The Government money was unsecured anyway - the stock would have been worthless if GM went under.

 

 

 

What? I don't understand what you mean by this.

 

GM was insolvent. There was ZERO BOOK VALUE to their stock. It was already worthless. Lending an insolvent corporation money violates every last ounce of good judgment. Would you loan $100k to a guy living on the street?

Edited November 13, 2013 by RichardJensen

[RichardJensen]

The federal government also doesn't normally ensure that union contracts emerge from a bankruptcy proceeding largely unscathed, but that is what happened. So one can hardly blame the stockholders for expecting a similar deal.

 

What?

 

The feds FINANCED GM's bankruptcy. Therefore, unlike PRIVATELY FINANCED bankruptcies, the feds were in a position to prevent the offloading of billions of dollars of liabilities onto an ALREADY INSOLVENT PBGC.

 

And union contracts did NOT emerge unscathed... The UAW had to reopen their contract and revise it significantly.

Edited November 13, 2013 by RichardJensen

[akirby]

What? I don't understand what you mean by this.

 

GM was insolvent. There was ZERO BOOK VALUE to their stock. It was already worthless. Lending an insolvent corporation money violates every last ounce of good judgment. Would you loan $100k to a guy living on the street?

 

How was the money that GM got from the government "secured"? If the new company failed the stock would be worthless, so I fail to see the difference in what actually happened versus the government simply providing an unsecured loan. The risk of losing the money is the same either way.

[grbeck]

 

What?

 

The feds FINANCED GM's bankruptcy. Therefore, unlike PRIVATELY FINANCED bankruptcies, the feds were in a position to prevent the offloading of billions of dollars of liabilities onto an ALREADY INSOLVENT PBGC.

 

And union contracts did NOT emerge unscathed... The UAW had to reopen their contract and revise it significantly.

But that has nothing to do with whether union contracts, in a normal bankruptcy, emerge without any major concessions. (It also didn't stop the federal government from making Delphi management employees rely on an already insolvent PGBC, which resulted in pension benefit reductions to some employees, along with the loss of company provided health care coverage.)

 

The concessions that the UAW did make were insignificant, and mostly involved lower wages for people who hadn't yet been hired. (Most bankrupt companies aren't contemplating the hiring of new people. The company is concerned about the inability to pay current employees.)

 

They involved no wage cuts for current members. The UAW told current members that the revised contract involved meant "no loss in your base hourly pay, no reduction in your healthcare, and no reduction in pensions.” All of which would have been the norm in a conventional bankruptcy. In other words, it made no meaningful concessions.

 

The bottom line is that certain parties were favored by the federal government. We can't tell some parties to the proceedings, "This is the way it has always been done," while making exceptions for other parties under the guise of, "this was unprecedented," and then turn around and claim that there wasn't any favoritism.

Edited November 13, 2013 by grbeck

[RichardJensen]

 

How was the money that GM got from the government "secured"? If the new company failed the stock would be worthless

 

This doesn't make any sense.

 

The whole reason why DIP financing works is because the entity that provides the financing gets equity, not a secured claim against assets.

 

You can sell equity.

[RichardJensen]

The concessions that the UAW did make were insignificant

 

 

 

The bottom line is that certain parties were favored by the federal government. We can't tell some parties to the proceedings, "This is the way it has always been done," while making exceptions for other parties under the guise of, "this was unprecedented," and then turn around and claim that there wasn't any favoritism.

 

1) The concessions made by the UAW resulted in cost-competitive labor. Review of the dozens of airline bankruptcies show that bankruptcy courts will not tear up union contracts to give one player in a market a significant advantage over all others.

 

2) The DIP financier was given precedence over all other creditors. And that is indeed the 'way it has always been done. Similarly, the bankruptcy court said nothing about how the DIP financier chose to dispose of its equity. This too is 'the way it has always been done.'

[akirby]

 

This doesn't make any sense.

 

The whole reason why DIP financing works is because the entity that provides the financing gets equity, not a secured claim against assets.

 

You can sell equity.

 

And if GM had not succeeded, now much would that equity have been worth? The whole point of having an equity secured loan is so you can sell the equity and recoup some of your money if the company fails. If GM had failed the stock would have been worthless and they would have been last in line to get paid from liquidation of assets behind other creditors.

 

I fail to see how that's any better than a simple unsecured bankruptcy loan, practically speaking.

[RichardJensen]

 

And if GM had not succeeded, now much would that equity have been worth? The whole point of having an equity secured loan is so you can sell the equity and recoup some of your money if the company fails. If GM had failed the stock would have been worthless and they would have been last in line to get paid from liquidation of assets behind other creditors.

 

I fail to see how that's any better than a simple unsecured bankruptcy loan, practically speaking.

 

Again, I don't have the slightest idea what you're talking about? Are you talking about a putative circumstance wherein a reorganized GM fails again almost immediately? The chance of that was extremely remote.

 

Also, there is no such thing as a 'simple unsecured bankruptcy loan.'

 

Debtor-in-possession financing carries with it claim status ahead of every other creditor including bondholders.

 

Therefore, when the new entity is organized, the assets of the new entity are divided up, with the DIP lender being made whole ahead of every other creditor. It is not unusual for the DIP lender to end bankruptcy with a significant, if not a majority stake in the new entity.

[akirby]

I won't argue the fine points of bankruptcy proceedings - I'm no expert. But here is what I don't like about the entire situation:

 

GM is still essentially the same company building the same products they were before and after the bailout with the exception of getting rid of a few brands and vehicles. Ditto for Ford. Ford was able to secure loans before the crash. GM was unable to secure a private loan after the crash. GM had the same equity available that Ford did to secure the loan. The government could have given them the same type of secured loan that Ford got. Ford shareholders kept their stock and now they have equity. GM shareholders were told to go pound sand. Ford pre-2008 vehicles are still fully covered for defects, recalls, etc. GM was given relief from pre-bankruptcy vehicles in certain cases - specifically an Impala suspension update that was made by GM to all police vehicles but which GM refused to apply to non police versions citing that they were "old GM" vehicles not "new GM" vehicles so it wasn't legally obligated. That's lawyerese bullshit.

 

The old shareholders should have been allowed to keep their stake and GM should have repaid every frickin' dime it borrowed or was given by the taxpayers. Period. The fact that they're making billions while the taxpayers and shareholders got shafted is ridiculous.

[RichardJensen]

GM had the same equity available that Ford did to secure the loan.

 

No, they didn't. GM's balance sheet was in far far worse shape. At the end of 2008, GM was functionally insolvent, with $86B in negative shareholder equity. http://www.sec.gov/Archives/edgar/data/40730/000119312509045144/d10k.htm#toc75433_15

 

Ford, by contrast, at the end of 2005 (the year before they took out that $23B loan), had $13B in shareholder equity.

Edited November 13, 2013 by RichardJensen

[RichardJensen]

The old shareholders should have been allowed to keep their stake and GM should have repaid every frickin' dime it borrowed or was given by the taxpayers. Period. The fact that they're making billions while the taxpayers and shareholders got shafted is ridiculous.

 

Why should shareholders have been allowed to keep their stake? GM was insolvent. Their stake was WORTHLESS. It had ZERO VALUE.

 

Loaning GM $50B, in order to recapitalize shareholders, violates every last ounce of common sense.

 

Do you know what GM's debt service would be on a $50B loan with a ten year term at 3% interest would be?

 

$1.5B per year. And that would do *nothing* to reduce the principal.

 

Under a conventional loan, their payments would be $5.86B per year.

 

How could GM possibly survive under debt service obligations of that magnitude?

[akirby]

Ok, Ok. I get it. But I still think it's a raw deal. GM should at least pay back the gov't for the shortage from the stock sale.

[RichardJensen]

Ok, Ok. I get it. But I still think it's a raw deal. GM should at least pay back the gov't for the shortage from the stock sale.

 

Yeah. It's a raw deal. And the existing $10B shortfall should be addressed.

 

But sometimes you have to pick the least bad option. I think Treasury did a pretty reasonable job. Not a perfect job, and not a job free from political meddling and rent seeking, but...

Edited November 13, 2013 by RichardJensen