The GM giveaway

Today's newspapers report the likely details of the possible bankruptcy of General Motors. It's interesting to look at the implied valuations of the stakes held by different parties.

The Obama administration wants holders of bonds to swap debt with face value $27 billion for 10 percent of GM's new stock. The UAW would get 39 percent in exchange for $10 billion that GM owes to a trust for healthcare for retired workers. The government would get 50 percent in exchange for its loans, which total $15.4 billion so far and $11.6 billion for the rest of 2009. Existing shareholders will get 1%.

GM's market capitalization today is $0.88 billion. This implies that the company is worth $88 billion after it is recapitalized in bankruptcy. Using this valuation, bondholders will get new stock worth about $9 billion. The UAW will give up its $10 billion claim in exchange for new stock worth $34 billion. The government will get $44 billion of stock in exchange for $27 billion of cash.

The general principle is that shareholders are the residual owners, so it's understandable they should get effectively wiped out. Similarly, the bondholders lent their $27 billion a while ago, so they don't have a senior claim. $9 billion for them, or 33%, seems reasonable. The government lent its money more recently, so it has the senior claim, so it should get over 33%. Why it should get over 100% is not clear.

What is egregious is that the the UAW should get 340%. Their $10 billion is a claim that is several years old. In seniority it should be similar to the bondholders' claim.

Two aspects of the plan make it even worse. First, the UAW will have its cake and eat it too: the new GM will still owe $10 billion cash to the retiree health plan. The UAW will get upside from its stock, and downside protection fom its cash claim. Sweet for them.

Second, the UAW will have 39% voting rights. This will be effective control on all issues where the government is not willing to fight the UAW publicly.

What can one predict for the future? Under union control, you can bet that GM will continue to sink. The government will never be able to cash in its shares for anything close to $44 billion. For a few more years, the union will be able to extract cash from GM, partly as wages and partly as healthcare payments. Perhaps the union will cash in some of its stock, but most likely they will use it just for voting control. In a few years, when the corpse has been sucked dry, the rump will be sold off. The taxpayers will be out $27 billion cash. Most of this money will have been frittered away in payments to unproductive workers.