The Obama Administration made GM's bondholders an offer they couldn't refuse this week, and a group representing some of the largest institutional investors took the offer. The alternative, as GM made clear in an SEC filing, was for the Treasury to wipe them out in GM's now-inevitable bankruptcy. Under the terms of the Treasury's offer, GM bondholders will receive 10% of the company's stock in exchange for their $27 billion in bonds, plus warrants to buy an additional 15% stake in seven to 10 years.
That's an improvement on the government's earlier offer, but it's a far cry from what the Administration offered the United Automobile Workers for their $20 billion in claims. Assuming the UAW ratifies a new labor agreement, which its locals were voting on Thursday, the union's retiree benefit trust will receive $10 billion in cash, $6.5 billion in preferred stock paying a 9% dividend, $2.5 billion in debt, 17.5% of the new company and warrants to buy another 2.5% in five years, albeit at a steep price. In exchange, the UAW will accept more flexibility in work rules, and retirees will have to give up prescription-drug coverage for their Viagra and Cialis. Seriously.
In other words, compared to other unsecured creditors, the unions were offered the equivalent of a Cadillac this week. Bondholders get a set of steak knives and the hope that a car maker owned 72.5% by the government will eventually be worth more than it is now, which is essentially zero.
Treasury argues that bondholders, by rights, should get nothing because the money that GM owes to the government, or will soon owe to the government, eats up whatever value is left in the car maker. So even that 10% stake, Treasury officials argue, is 'a gift.' By this reasoning, bondholders have no right to be unhappy just because the UAW is getting a bigger gift. In the words of one Treasury official, 'Santa brought them both a present.'
At least some bondholders, helped by the threat of a total wipeout if they hold out, have seen the logic of this. But Treasury's calculation is fundamentally political, not financial. Treasury officials argue that they have to treat the UAW more generously than bondholders, or the employees won't show up for work on Monday. But this is bluster; the UAW needs GM as much as GM needs workers. The Treasury's generosity toward the union is much more about political payback to Big Labor than it is a hard-nosed business decision. But this is what happens when government plays business mogul.
The truth is that GM's economic viability depends on making its cost structure competitive. And from what we've learned about the demands being made on the union in this regard, the UAW hasn't been asked to give up nearly enough. According to the UAW, the new agreement entails no loss in 'base hourly pay, no reduction in . . . health care, and no reduction in pensions.' It also restricts the ability of GM to import cars made abroad.
The UAW, in other words, remains unbowed, and it knows that GM's new owners want to keep Big Labor happy. After the likely bankruptcy filing in coming days, the Obama Administration will own America's largest car company. If the Administration runs GM according to the same political priorities it has displayed in negotiating its restructuring, do not expect the taxpayer financing to stop anytime soon."
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