Obama a government loan shark

Iain Murray:

President Obama’s takeover of General Motors is a disaster in the making. Not only is it bad for GM, it also sets terrible legal precedents and rewards the president’s political allies in a brazen display of political patronage. Taken as a whole, the so-called rescue belies the president’s promise to end politics as usual and undermines the values of the free-enterprise system that has fueled American prosperity.

Last year, GM’s management team argued strenuously that the company could not go through normal Chapter 11 bankruptcy, because no one would buy a car from a bankrupt company, and therefore a bailout was needed. This proved to be a terrible mistake. It was like an individual trying to avoid bankruptcy by going to a loan shark; the federal government has taken a shark-like, extortionate bite.

GM has been forced into a change of ownership by the administration’s auto task force, which was supposedly set up to negotiate a rescue plan but instead has imposed one of its own design. Virtually the first thing it did was to fire former GM chief executive Rick Wagoner. Since then it has done everything it can to impose political control over the company.

What we now face is a nationalized car maker, with the government owning 51 percent of the company and the United Auto Workers (UAW) union holding a stunning 38 percent of shares. Bondholders, who normally have first claim on a company’s assets, receive only 10 percent instead, and the current stockholders get the remaining 1 percent.

Consider that for a moment. The government and the current administration’s political fellow-travelers own 89 percent of an American company. This is a terrible precedent. Just ask the domestic British auto industry. Unfortunately, it won’t answer, because most of it went out of business when the British government tried the same tactic in the 1970s. The government attempted to save a dying domestic industry by nationalization and heavy investment in R&D to produce a “product-led” recovery. That recovery never emerged, because the unions put saving jobs before producing good vehicles (as I detail elsewhere). With the UAW now owning 38 percent of the company, should we expect anything different from GM?

The GM nationalization ignores the lessons of history, and its terms are plainly unjust. The UAW, acting for its members who are former workers and GM pensioners, did indeed represent something like $20 billion worth of GM’s liabilities. So the idea that the union should get an equity stake in return for that is fair enough. However, the UAW is getting three times as much as the bondholders, who represent $28 billion of GM’s outstanding liability. When the bondholders protested, the administration refused to meet with them.

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He gives some examples of bond holders harmed by the deal. The administrations arrogant treatment of secured creditors is not only doing damage to investors, but will permanently damage the credit markets in the future making it either more costly or impossible for companies to get the financing they need to develop and sell new products.