The true story of the GM bailout

| June 30 2012
Christopher Cook

In the past, speaking out against unions was rendered, through assiduous propaganda efforts, rhetorically proximate to speaking out against decency and goodness itself. If you said a cross word about public unions, you were taking a stand against noble teachers and brave, handsome firemen. If you spoke up about private union abuses, you were against the everyman. After all, your own uncle was a union man. Your father worked on the line for 40 years, for goodness sake. They gave him a good living and a pension.

Those days are coming to an end. Private union membership is on the decline, and is now down to about 7%. Most private-sector industries—both workers and management—are finding unions increasingly unnecessary or burdensome. And the taxpayers are slowly coming around to the notion that public unions enjoy an unfair advantage over the very taxpayers who pay for their wages, pensions, and benefits. States are discovering that that though politicians sure do love the votes that unions send their way, the pensions and benefits that they are negotiating are not sustainable. There is not enough money to be squeezed out of already overburdened taxpayers, and borrowing is not a viable long-term solution.

Scott Walker’s victory in Wisconsin has opened the floodgates. The truths about unions were there beforehand, but Walker proved it is possible to stand up to them, even when they throw everything they have at you. This will set off a chain reaction. It has made it possible for people to speak out. Others are just learning about these issues for the first time, now that they have been brought to prominence. Politicians eager to balance state budgets and relieve taxpayers now have an example that it is possible to do so.

We have focused on the difficulties associated with unions for a long time here at Western Free Press, and we will continue to do so. The foregoing is one of what will no doubt continue to be a series of posts on the subject.

The tale of what really happened with the GM bailout is fairly shocking, and you should read the entire thing. I will excerpt some highlights.

Most people simply don’t realize that the bailout of GM wasn’t a bailout of the company. It wasn’t a bailout of its shareholders, who lost everything… or its bondholders, who lost almost everything. Where did the money go? To the union. The United Auto Workers (UAW) ended up with all the money.

Why was GM in trouble in the first place?

GM slid into bankruptcy primarily because it couldn’t profitably manufacture cars. (Yes, there were plenty of other issues, like too much debt, investments in subprime mortgages, etc. But the primary reason it couldn’t solve these other problems was that it hadn’t been making routine profits from manufacturing cars in about 20 years.) And the biggest single reason it couldn’t profitably make cars was because its labor costs had soared.

So, the bailout bailed out the unions without fixing the underlying problem:

At $56 per hour, GM still has the highest labor costs in the industry.

The bankruptcy process didn’t deal with the biggest financial hurdle GM faces, which is an enormous (and growing) unfunded pension liability. When the company entered bankruptcy, it owed $20 billion to the trust that was established to pay for the health care of its retired workers. Its pension program, with $100 billion in obligations, was also underfunded by roughly $10 billion. That’s $30 billion in legitimate claims, which the union had to present to the bankruptcy court on behalf of GM’s employees.

Nothing gets fixed . . . or does it?

It could have received a mixture of cash and equity in the new GM – just like any other unsecured creditor. But there wasn’t really a bankruptcy court. Instead, there was Steve Rattner – “the Rat,” as we call him – the crooked Democratic political operative under investigation for bribing New York State pension officials. Obama made him the “car czar.”

His job wasn’t to fix GM. It was to deliver billions to the union and, thus, deliver Michigan for Obama in the next election.

This is how Obama operates. It was the same with the massive stimulus bill—most of the money went to unions. This is an attempt to strengthen the left’s political power-base, and to enhance his reelection chances. It is plain to all those who care to look.

Here’s what we do know about where the money went… Bondholders got 10% of the new GM – about $4 billion worth of stock at the time of the IPO. However, they weren’t allowed to sell until much later, so that value dropped about one-third by the time they could have actually liquidated. Thus, bondholders ended up getting about 10 cents on the dollar. The unions, on the other hand, got paid 100% of the pension liability – about $10 billion, which was simply passed onto the new GM and has now grown to $13 billion.

In addition, the union’s health care trust got 17.5% of the new equity (worth about $6 billion), plus $9 billion in preferred stock and notes. These securities are not only worth more, but they will also likely end up with essentially all the company’s cash flows for the next decade.

In total, the unions walked away with about $28 billion in cash and stock (out of $30 billion owed). Not surprisingly, that’s almost exactly the amount of money that’s gone missing from the government’s accounts. The union also retained a position of absolute control over the company’s earnings.

In short, the unions got paid 93% of what they were owed and will likely continue to have a legal claim to virtually all of GM’s cash flow. The bondholders got a few pennies. The taxpayers lost $25 billion. And GM still can’t make a real profit. Bravo!

read the whole thing

Stunning. Simply stunning. It is entirely reasonable to refer to this action as illegitimate, based on any reasonable understanding of how a representative government is supposed to function.

Corruption happens in any system, but usually it benefits a small number of people and involves comparatively small amounts of money. This is corruption on a completely new scale. Barack Obama is taking billions—and close to trillions—from taxpayers and using it to benefit not only himself but millions of his political allies. This is corruption orders of magnitude beyond what has previously been known.

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