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Getting There, Slowly

Larry Kudlow questions whether the fix is in on the upcoming GM restructuring plan:

The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock. Huh? Did I miss something here? And Uncle Sam will have a controlling share of the stock with something close to 50 percent ownership. And no bankruptcy judge. So this is a political restructuring run by the White House, not a rule-of-law bankruptcy-court reorganization.

Not only are the bondholders being asked to take a disproportionately small share of the equity, but they are being asked to take it in a firm in which the government would be the majority shareholder. Yes, the government would be the majority shareholder of a failing company. Yikes! If the experience of the TARP firms and decades of nationalized industries (e.g., Amtrak) weren’t enough to scare off the bondholders, the current rhetoric and regulatory schemes coming out of Washington (which insist the car companies produce unprofitable green cars) should be enough to petrify them. If there is any doubt as to how the government impacts shareholder value just check with Ken Lewis over at Bank of America.

But of course the bondholders can just say “no.” They needn’t accept the UAW bailout plan — which this appears to be. And if in fact they hold their ground and GM is forced into bankruptcy – real bankruptcy where judges are not moved by the UAW’s political clout — then they can make their arguments to a judge and defend their financial position on its merits. They could hardly do worse than the proposed UAW-Obama plan.

This may be the game here. The Obama administration “did its best,” but can say to its Big Labor patrons that it’s the “fault” of the bondholders that GM is forced into bankruptcy. Well, whatever political cover they seek, the result may be inescapable. Unless the bondholders cave to considerable political pressure (not an uncommon thing these days, as Bank of America and AIG can attest) GM will finally wind up, long overdue, in an apolitical bankruptcy court, the tried-and-true mechanism for liquidating and restructuring companies.

We may finally get there, albeit after tens of billions of dollars have been poured into a failing business that is going to employ fewer employees and play a smaller role in the overall American economy. Not exactly government at its best. But perhaps it is a peek at what will become a familiar pattern, as the banks learn their fate from the “stress” tests and find out they must come up with massive additional funding — which is unavailable except from Uncle Sam. Welcome to the era of post-capitalism.



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