The General Motors Travesty

This week brings the long awaited "New" GM IPO. The company will issue 365 million common shares and 60 million preferred shares, with the option to increase that amount by 15%, based on demand. There is tons of hype around the issuance, with the GM "road show" long underway. Institutional demand for the shares is strong, with sovereign wealth funds receiving sizable allocations. There is some irony here, as the offering is restricted, meaning retail investors will not be able to directly participate in the offering price. Wasn't it the public that bailed them out?

GM is expected to price as high as $29 a share, on Wednesday of this week, with the shares beginning trading on the NYSE and TSE on Thursday. Because of the apparent strong demand for the stock and a better overall IPO environment, guesses are that the stock will trade into the low 30s immediately. Also, some analysts are valuing the stock into the 40s.

Certainly, with the leaner restructured GM reporting earnings of over $4 billion for the past couple of quarters, there is reason to believe that the company is a worthwhile investment.  However, there are a slew of issues that I believe need to be considered before deciding to participate in the new GM. And they go well beyond investing and earnings.

We all know the auto industry went through an upheaval. General Motors went broke because it was overwhelmed by a fatal combination of lack of competitiveness, a plunging market share, over regulation by the government, mismanagement that crushed the company with a huge $95 million debt and massive costs from old contracts with its unions. Though there have been concessions by the UAW, factories closed, dealers shuttered and other costs cut, the company that will be trading this week is made up of remnants of that old company, saved by the Obama administration's prepackaged bankruptcy.

The new GM still has significant debt, huge questions about management, a lack of a strong financing arm and what still looks like a very challenging environment for the auto industry. Add to that, the company still has $29 billion in unfunded pension liabilities, some $12 billion which must be funded in the next several years; and from where? So, despite a couple of decent quarters, much of which came from cost cutting and interest savings, GM may turn out to be a disappointing investment.

Just to jog your memory about how the GM bankruptcy went down; the US government bailed them out with a direct investment of $50 billion in cash and loans for $6.7 billion; giving the taxpayers ownership of 61%. Canada did the same, taking 12% ownership with $8 billion in cash and a $1.4 billion loan.

The bankruptcy was challenged from the start by bondholders, who held $27 billion in GM debt. Senior bondholders, by law, are supposed to receive 100% of assets before anyone else gets anything. However, the bankruptcy judge gave them a minor 10% stake of the company. In contrast, the union, for $20 billion owed to its health trust, received 17% if the stock, $2.5 billion in cash and $6.5 billion in preferred stock. So the union received over three times in value what the secured debt holders received and they should have been behind them receiving anything at all. The government, for $50 billion, received 61% of the company, also disregarding the senior bond holder's first-place position.

Many bondholders were furious, and rightfully so. There is anecdotal evidence that there was threats and strong-arming that eventually had them back down. Here is a clip of the transcript of a radio interview of Thomas Laurie, the attorney representing the Chrysler creditors at the time:

Lauria: "Let me tell you it's no fun standing on this side of the fence, opposing the President of the United States. In fact, let me just say, people have asked me who I represent. That's a moving target. I can tell you for sure that I represent one less investor today than I represented yesterday. One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House Press Corps would destroy its reputation if it continued to fight. That's how hard it is to stand on this side of the fence."

This administration's actions in designing the GM bankruptcy was gangster-like and an outrageous disregard of bankruptcy law.  The Obama administration essentially confiscated the assets of the bondholders and gave them to the union; wealth distribution at its finest!  If this is what it took for GM to remain alive, should it be alive?

Supporters of the GM bailout make a case that hundreds of thousand of jobs were saved between GM and in companies in the badly weakened supply chain. That may be true, but at what cost. The void that would have been left by the disappearance of GM would have been filled by the more efficient auto companies. Also, GM's departure would have created room for new auto companies to come on line, bringing fresh ideas and new technologies.

This is the concept of "creative destruction"; the old and inefficient dies and is replaced by new - more efficient technologies. New and existing companies take up the slack, grow organically and hire new workers. It's a basic premise of capitalism, and what made this country the strongest in the world. Its how we got the "automobile" in the first place! Maybe President Obama would have bailed out the horse and buggy industry, just to save their jobs.

I'm very happy for the people that still have jobs as a result of the GM bailout. This recession has made it extraordinarily tough to find a job. What about the millions of people that will not be employed by the companies squeezed out by the existence of what is still a very inefficient government owned General Motors.

You might say, look at GM now, bringing out its new electric car, the Volt. There's new technology. That's a laugh. Here's the truth. Even though the power is supplied solely by an electric engine, the Volt is essentially another hybrid. It can run only 25 to 50 miles on battery, well below the performance and at higher cost compared to Nissans batteries. After it runs out of power it is charged by a small gas engine, giving it a range of 340 miles. "Popular Mechanics" rated the Volt at 32mpg city and 36 mpg highway, saying its overall "a well engineered car". If you really want electric performance, why pay the Volt's huge price?

Taxpayers have subsidized the development of the Volt with $400 million. The sticker price is $41,000. The government (taxpayers) is giving a $7500 tax benefit as an incentive to buy it. So the cost is $33,500. GM plans to build 10,000 Volts in 2011 and 45,000 in 2012. Beyond that, capacity is a question. So, if by some miracle, GM sells all the Volts it plans to build in the next two years, the average cost to build the Volt will be around $50,000. So, at best, this "new" GM, still government owned, now offering shares to the public, will only lose around $16,000 for every Volt it sells. I wanna invest in that!?!

In contrast, the Nissan Leaf will sticker out at $32,000 ($24,500 after the government incentive) and has 100 mile range on electric before it must be charged.  Nissan is building capacity and will be producing 120,000 by year three, and is expected to be selling Leafs at a profit by then. The lower price and better performance compared to the Chevy Volt comes from Nissan's much more advanced battery technology.

Also, Ford is planning to add four electric cars to its line. The Lincoln MKZ is a luxury hybrid that is a far better value than the Volt, with a sticker in the high thirtys. And Honda has the FCX Clarity, which runs on the hydrogen fuel cell technology of the future. This year, there will only be 100 in the hands of individuals, as a test in California. And having enough hydrogen fueling stations is years away. To GMs credit, they're also working on fuel cell technology; but they're way behind Honda.  

The government is doing everything it can to make the case that the GM bailout was a good and necessary decision. For example, last April, GM repaid the loan portion of the funds that the U.S. Government and Canada gave GM in the bailout ($6.7 billion to the US and $1.4 billion to Canada).  GM's then CEO, Whitacre, appeared in a TV ad, giving cheer to the fact that the loans were repaid, with interest, five years ahead of schedule. Here is the commercial (http://www.youtube.com/watch?v=oUIP9NGsH9o),

This was a pure deception. What's true is that the amount of money given to GM in the bailout included $13.5 billion for working capital, enough funds to operate in the event of an extended economic recession or a "double dip". That hasn't happened, yet. So GM found itself with extra funds. Those funds were used to repay the loans. It wasn't because suddenly the company found good fortune or because it was now being brilliantly managed. Of course, GM is not being held accountable for this lie. Maybe you will do so.

Coincidently, while reducing its unneeded working capitol, GM applied to the Department of Energy for $10 billion in loans to retool, so it could meet the new government café standards. So if you need the money for retooling, why pay back the loans? It was to pull off the deception, setting the groundwork for this preposterous IPO. This is really some kind of a joke. And the joke may be on the new investors.

More bizarre stuff: GM, in their registration, is reporting assets that include $30 billion in "good will". GM essentially found a new way to use good will to create assets. Not including good will, there is about $29 billion in real assets; like factories. If you take out the good will, which came from "fresh-start accounting", GM would have a net worth of -$6 billion, or worse. Please read that as a negative. Also, based on the company's future performance, there could be a write-down of good will, which will negatively affect earnings. This is the company they're asking you to invest in; one that could still be called "broke". For the details on this, read Edward Neidermeyer's article here: http://www.thetruthaboutcars.com/2010/09/gms-30b-goodwill-windfall

The GM IPO will reduce the government's holdings in the company to around 43%. That means they're selling stock, which taxpayers already own, back to taxpayers. Somehow that seems bizarre. And, they're essentially selling stock to institutions that was stolen from senior bondholders. Isn't a person that buys stolen goods called a "fence?"

Another wild aspect of this government and union owned company is that a GM employee can retire and receive pension benefits at an age as young as 48 years old. And this is while taxpayers are being told that the retirement age must go up to deal with the U.S. budget deficit. So essentially, money is being withheld from senior aged retirees, going on social security, so GM's government paid employees can retire at young ages. This is so ridiculous!

Well you can hear my cynicism and outrage.

General Motors is a zombie company, alive on the flesh and blood of taxpayers, many who unwillingly put money into it to keep it alive. To pay this back, GM would have to be valued (and liquidated) at $73 billion. Its peak value was $52 billion. Keeping it alive has given GM $45 billion in tax credits. Add that to government favoritism and GM will have a competitive advantage over more efficient companies for many years to come. This will result in jobs lost, not saved. Keeping GM alive was mistake, a crushing blow to the workers of America and a misappropriation of taxpayer funds. Bailouts like this should never happen again.

This GM IPO is not about capital creation, not about running a great company, but about giving credence to the Obama administration's actions to bail out the company, appease the unions and gain a foothold in US corporations. It's a perfect step supporting Obama's desire to turn the US into a "social democracy", using democratic means to transition into socialism. This moral hazard can't be erased by the GM IPO.

The recent election saw voters come out strongly for conservatives, giving Republicans a sweeping win and control of the U.S. House. This, of course, was less a vote for the Republican candidates and more a vote against Obama's socialistic ideological confiscatory policies. The IPO of new GM is a culmination of this administration's perilous actions.

I have owned many GM cars. My first was a 1969 Camaro. In fact, I think the new Camaro, a throwback to the old one, is beautiful. However, just as I did in the recent election, I will vote NO to policies that endanger our future. I will vote NO to government's invasion and control of private business. And I will vote NO to ideological pretense that history has proven is doomed to failure.

 That means voting NO to the new General Motors. For me, trading a share of GM stock, a GM bond or buying a GM product is lending credibility to actions that sabotage the future of my children and grandchildren.

I drive a Volvo, which is owned by Ford Motors; a company that in 2009 chose freedom.

 

Disclosure: I have no direct investments in automobile companies or related industries

New GM bullshit My 92 year olf mother in law has about $40,000 of GM bonds that is a good portion of what she was going to live on for the rest of her life. Today that $40,000 will not pay for one month in the retirement home with no income coming from the bonds. I for one will not be buying a GM product. Ever. Also look how well the GM bank Ally is doing. Too bad they did not put a stake in the heart of the monster. Submitted by Jerry (not verified) on Tue, 2010/11/16 - 1:30pm » reply |

It sure is easy for a guy It sure is easy for a guy who makes a living sitting at a desk typing articles to criticize a man or woman working in an auto factory all their working life who want to retire after working there for 30 years. And back in the days when autos starting replacing buggies Henry Ford increased auto workers pay to an unheard of $5 a day--much more than buggy workers were earning. Today under the guise of efficiency (meaning lets increase CEO pay to the sky) workers are being asked to take big pay cuts. Henry Ford's workers were given pay so that they could afford buying one of Henry's cars. With their pay cuts workers now have a hard time keeping their houses let along buying a new Toyata or Honda. And Henry even built houses in Dearborn so his supervisors at the tractor factory could afford good housing! Yeh, lets throw all those US auto workers out of work (including Toyota and Honda workers) when GM crashes and takes with it all the auto supply firms, just so we can keep those fat cats on wall street and those who write so-called financial news blogs in the life style they have been accustomed to. Submitted by John Krienke (not verified) on Tue, 2010/11/16 - 2:33pm » reply |

gm And I am sorry to tell you that Volvo is no longer part of Ford, which sold the brand to Geely, a chinese company since 2010 Submitted by jessiekay on Tue, 2010/11/16 - 4:35pm » reply |

Camaro Well, I'm no fan of unions (to say the least), but have driven used GM luxo-barges for quite awhile, and have loved every one of them -- say "home James, and please awake me when we arrive", and they just do it in comfort and style. I used to buy them with near 100k miles, cheap, drive them for another 50k, and by then they were just getting broken in, to tell the truth. Original plugs, belts, CV joints, all that. They were too damn good for GM's health to be frank, no one needed a new one. I got lucky because people believed that even modern cars crapped out at 100k and sold them cheap. But, you'll like this -- I made enough shorting GM stock before the 'ruptcy to buy a nice new 2010 Camaro 2ss, serial 341, special order. Who would have been ignorant enough to loan me the shares? Probably the UAW! Yay! So not all of us taxpayers were complete losers in the deal...heh. Let me tell you, this car's beauty is not just on the outside, it's one heck of a serious hotrod for the 21st century, and gets 5 mpg better mileage than my Honda Ridgeline 6 cyl -- with only about twice the HP. Maybe 3 times, since GM was so desperate at that point to sell a car, they super tuned it down in Texas after having it built in Canada, just for me. It's a 'vette with a better car on top, basically, and no, it won't take you home while you sleep, it's not that kind of thing at all. It's been tested with police assistance here to near 200mph, at which point I gave up, not the car -- it felt fine, but places you can do that are not common, even superhighways or the Martinsville speedway owned by a partner of mine don't really make the grade for that kinda nutty-ness. Submitted by Doug Coulter (not verified) on Tue, 2010/11/16 - 10:51pm » reply |

The General Motors Travesty GM, I'm not a lawyer, and obviously you aren't either. All the original bonds in GM were unsecured, senior and junior. Secured debt takes precedence over unsecured debt, and in Chapter 11 bankruptcies new lenders can come in to fund continuing operations and that debt then becomes super-senior to all prior debt. Some of the debt to the union health fund and pension fund was classified secured, and some as super-senior depending on when the debt was incurred. All the government debt was super-senior. The total GM debt senior to the bond holders was large enough that even the senior bond holders could technically have been wiped out. Prior to GM's declaration of bankruptcy the bond holders could have made a deal that would have resulted in them getting 30% of the reorganized company. I bought some GM bonds on that basis and ended up making money, but I should have made 3 times as much except for the greed of the bond holders as a group and the stupidity of the lawyers representing them. The only reason that Ford "chose" freedom in 2009 is that they were in a position to "chose" freedom. In late 2006 they put everything of value the company owned up as collateral to secure an $18 dollar loan. From what I am told they were about 8 months away from not being able to make their payments in early summer 2009, in which case those debtors would have stepped in immediately to take possession of the company(this is hearsay - I can't say for certain it is true), wiping out all other unsecured debt holders and equity holders. Luckily things turned around and you know the rest. The only thing that really irks me about the way the whole thing worked out at GM is that in essence the company was looted by the original board of directors and senior management. From 2001-2009 the directors and top 100 executives at GM made something like $20 billion total!!! About 1/2 that amount was in bonuses. It would be nice if there was some sort of way to claw that money back. Submitted by David R Fry (not verified) on Wed, 2010/11/17 - 1:32am » reply |

The UAW Raped GM The Top 100 Execs at GM did not get anywhere near $20 BB over 8 years. Do the math: that implies $25 MM a year in comp per exec. I doubt that the Top 10 even got $2.5 MM a year in comp. This sounds like DailyWorker or UAW propoganda. Let's look at the facts. From 1966-2007, GM stockholders made nothing while the UAW raped the company. Yes, blame also goes to the GM execs who failed to break the UAW. Caterpillar broke the UAW in the early-1990's; today the company is a global behemoth and the stock is up 15-fold in 17 years. GM has shrunk by 2/3rds and it's stock lost 100% of its value. The UAW VEBA should have been given general creditor status. The UAW killed GM and then saw its unreasonable demands over the last 40 years given priority over the rightful owners of GM stock and debt. Of course, had the UAW leadership been forced to go to their membership and tell them that their pensions and healthcare benefits were going to be slashed like the United Mine Workers or Airline Pilots or Flight Attendants, they would have been lynched by their members. That would have been the right outcome since they led them down this path. Had the UAW consented to the layoff of 100,000 workers in the 1980's GM would have been profitable over the last 3 decades. Instead, the company lost money selling cars in 19 out of 23 years from 1983-2007, a time when auto sales exploded domestically. How can you lose money in all but 4 years out of 23 when you have the largest market share every single year ? Simple: your cost structure is out-of-whack. And GM's CEO morons starting with Roger Smith kept deluding them that the next wave of cars and products would grab market share and allow them to earn their way back to profitability. Basically, the stayed at the roulette wheel and kept gambling on the theory that their luck would eventually turn. I feel sorry for all the UAW workers who have lost their jobs over the years. But they voted for their fate by continuing to elect intransigent militant UAW leaders who presented an "Us-against-Them" mentality. They bled GM dry, and the company's balance sheet hemorraged red ink for 30 years. Profits were fictitious GAAP accounting entries. On a cash-flow basis, every analyst on Wall Street said GM and the American auto industry were functionally bankrupt as early as the mid-1990's, but the UAW kept up the fiction. Even Goettelfinger said that he didn't believe GM would file for bankruptcy in Summer 2008. What planet are these idiots from ?? Now, thanks to Obama's socialist allies, the foolhardy negotiating tactics of the UAW have been insulated from the consequences they should have faced by elevating the VEBA and pension/OPEB claims senior to the bondholders. DIP financing does receive a priority in any restructuring yes, but not a general unsecured creditor. This decision was made because the UAW was involved in the Democratic Primary and has a large slate of delegates to the Democratic Convention, and bondholders didn't. Disgusting. Submitted by FrankieB (not verified) on Sat, 2010/11/20 - 3:04pm » reply |