One of the key campaign themes this year is that President Obama is responsible for saving General Motors. VP Biden is well known for his slogan: “Osama Bin Laden is dead and GM is alive.”
Of course, Bin Laden is gone and very few people in the world regret this. (See my assessment of that event in the context of Obama’s strange approach to foreign policy here, here and here.) But the value of his passing for Obama is limited as it is now very clear that his death did not mean the end of Al Qaeda. The brave and articulate journalist Lara Logan made clear that even in Afghanistan the terror group remains a significant force. And as recent events indicate, it has also spread to many other areas of the world.
So that leaves the other half of the Administration’s slogan, that GM is alive. How valid is this claim?
I have been following the auto industry, and the UAW and GM in particular, for many years. I have advised UAW members as far back as the closing of the GM plant in Fremont, California, in the mid-80s. (See my letter then in the New York Times here.) More recently, I advised UAW members impacted by the concessions demanded in 2008 by GM, including petitioning the Securities and Exchange Commission on their behalf to try to prevent the massive cuts in pay and benefits these workers have suffered over the years.
The bottom line is that General Motors is, to this day, being kept afloat by massive financial support from the UAW and the government. Without that support its stock price would likely collapse, its cost of borrowing would skyrocket and its employees would suffer further cuts in wages and benefits.
How do I know this is the case? It is a (relatively) simple matter of following the money, or, in business school terms, analyzing the capital structure of the company.
The starting point of this analysis is 2008 when the UAW gave in to demands from GM to convert the GM health care plan into a Voluntary Employee Beneficiary Association, or VEBA. I have analyzed this in detail here and here. But the long and short of the VEBA is that it did GM a huge favor by forcing the UAW to take over responsibility for funding health care for all current and future GM retirees.
GM was supposed to fund this VEBA with $30 billion in assets and cash. But that never happened. Only part of the cash ever turned up. Instead, GM went through a White House supervised bankruptcy (and here Governor Romney is right) that was little different in the end than a normal bankruptcy under the well established, and socially progressive, federal law that was put in place by FDR. The White House claims that they intervened in order to protect the GM workforce but in fact they intervened to impose further cuts in pay and benefits and to further weaken the VEBA. I outlined alternative progressive approaches in Dissent and on the Real News Network here, here and here.
Out of this White House bankruptcy proceeding came a new GM reorganized with the financial support of the United States Treasury and the UAW VEBA. The Treasury owned more than 60% of GM’s shares and the VEBA 17.5%. (The UST now owns 30% after the IPO and the VEBA 10%.) Instead of the cash and diversified asset base it should have the VEBA was forced to accept a massive chunk of stock in GM. That left the VEBA dangerously over invested in GM, a violation of every conceivable fiduciary principle.
New GM then conducted an IPO in 2010 which was supposed to allow the VEBA and the Treasury to sell their stakes in the company at a profit. But the IPO never got to the needed break even price of $53 per share and likely never will. (I analyzed the risky IPO here in 2010.) One recent assessment by Reuters says GM stock is “struggling” as European demand remains weak and the transition to new more competitive models has been slow.
According to The Detroit News, “The Treasury Department says in a new report the government expects to lose more than $25 billion on the $85 billion auto bailout. That’s 15 percent higher than its previous forecast.” Forbes thinks GM could be headed back into bankruptcy, noting that more competitive companies like VW “are eating GM’s lunch.”
While some in the auto industry are critical of the Forbes analysis, they nonetheless admit that the success of GM is dependent on moving outside the US to places like China. In other words, President Obama saved GM for the 1% not for the 99%.
Treasury invested approximately $50 billion in GM, sold shares worth half that amount in the IPO and has watched the value of the remainder sink to slightly more than half its original value. They are sitting on an unrealized loss of $16 billion. GM’s stock has never regained its IPO price, which suggests, of course, that it was over-hyped.
Today, GM is trading at $24.50 per share. The Treasury sold a piece of its holdings in 2011 further reducing its stake to 30%. Despite pressure from GM management, which wants to shake off government oversight, to sell the remaining stake, the Treasury has held on to its 500 million remaining shares. This is likely for political reasons because a final sale would mean a final tally of the Obama strategy of throwing away taxpayer money on a company whose core strategy is to shift production to China, Russia and Mexico.
A stock sale of that magnitude, by either Treasury or the UAW’s VEBA, would create tremendous downward price pressure. And, of course, it would rob Joe Biden of the second half of his slogan, just as the recent “Tet Offensive” by Al Qaeda in the middle east and North Africa destroyed the first half.