Tuesday, April 28, 2009

20th Century Motor Company, Anyone?

Okay, so today, GM announced its plan for how it's going to emerge from its current dilemma. Here is what the brains trust has produced:

Under the plan, GM is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans.

At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

Um...what? So, if the Obamanoms own over half of the company (making it a government agency, right?) and the union owns 39%, what exactly is GM? Apparently 11% is left for whatever brain-dead shareholders want to go along for Mr. Car Czar's Wild Ride.

Believe it or not, I see this development as a good thing. GM abandoned maximizing shareholder value (the only valid purpose of a firm) as its guiding purpose long ago, in favor of a "stakeholder" position. This was not the shareholders' fault, really. The government has forced GM to comply with almost as many regulations as the financial industry must contend with. And labor makes sure that what little money GM makes from cars goes directly to them. This new arrangement simply makes explicit what has been the case for years.

In the same vein, Chrysler has now agreed to cede a majority share to the UAW, with big Gov taking a 10% stake. So, basically, the inmates are running the asylum. May U.S.G.M. and U.S. Chrysler get exactly what they've bought, I say.

As a side note, Ron Gettelfinger, the UAW's chief executive, is a graduate of the Indiana University School of Business. Thus, I'm sure he'll be more than capable of guiding these firms to success. Right? I guess it could be worse. He could be from Purdue.

What I want to know is, if the union is going to own Chrysler, and the government owns GM, who will the workers threaten to strike against?


  1. I'll forgive the Purdue smack you're talking, to suggest that you should see this development as a bad thing. The tanking of the auto industry is not over. Now simply the govt has the explicit role it played previously behind the scenes and will proceed to lavish favors upon it's state owned arms, while trashing the market for any respectable private player (read Toyota, Honda, Nissan, etc). It's state arms will not be more brazen about relying on the govt's help, since any shareholder oversight has been smashed.

    The real develpoment and litmus test is whether the American people will stand for it or not.

    Kendall Justiniano
    MBA Universtiy of Michigan 01
    BS ChE PURDUE (!) 91

  2. What I want to know is, will the bondholders stop this little sellout dead in its tracks?
    Here's a recent Detroit Free Press item to outline this aspect:

  3. The Purdue Objectivist community is pretty strong and goes back to the late 80's. Be careful.

  4. I can tell I've really struck a boilermaker nerve. Hehe.