WELCOME TO GOVERNMENT MOTORS

4/28/09

There are so many problems with the reorganization plan GM announced yesterday that the world itself could not contain the books that would have to be written to adequately address them. In the interest of time, and moving along on the myriad other things I have to accomplish, I’ll concentrate on only the most salient problems.

According to the plan outlined by Fritz Henderson yesterday, the government will own at least 50% of the new GM. Even if the unsecured bondholders pursue the sensible, and predictable, course and reject the offer of 10% of the equity in GM in exchange for their $27b of bonds outstanding, thus throwing this whole thing into bankruptcy court, the government will still own a very substantial, though perhaps not a majority, of the equity in GM.

The conflict presented by government control of GM is glaring. In order to survive, GM must, at least for the next several, and probably more, years, produce big pickup trucks and SUVs, the types of vehicles that the Obamacrats loathe. The government will encounter immense pressure from the bi-coastal wings of the Democratic Party to produce “green” vehicles, the degree of emeraldness, if you will, decided by government bureaucrats or, worse, Congresspersons from what was once called the quiche and chablis wing (Okay, so I’m an old guy who has no fear of showing his age.) of the Democratic Party, people who would no sooner ride in the front seat of a domestic vehicle than they would shop at Wal-Mart. Don’t believe for a minute that the government will play a “hands-off” role in GM; the government cannot resist its busybody impulses under any circumstances, and GM, the archetypical American manufacturing corporation, will prove too tempting as a laboratory for every crackpot, ill-conceived notion germinating in the febrile minds of the overeducated and underschooled political types who inhabit Washington, D.C.

So the government will be forcing GM to produce cars that, certainly at current gas prices, few want to buy and to eschew cars that give it a chance of returning to profitablity. The results are predictable: GM, trying to serve its government masters rather than its potential customer base, will produce cars that pile up on the lots of dealers who are forced to take them. With GM thus continuing to hemorrhage money, the government will be forced to take action by doing one of three things:

--shoveling more money into GM.

--putting huge subsidies on the purchase of those vehicles the Obamacrats have deemed sufficiently virtuous, or

--forcing Americans to buy cars they don’t want to buy through CAFÉ mandates or outright banning of vehicles deemed anathema by the government.

Ugly enough. However, there is another conflict: the UAW will own 39% of GM under the Henderson plan and will own a substantial stake of the company under any circumstances. Not only would this run counter to the owner/worker division of duties and stakes that has served our country so well for the last 200 or so years, but it would set up an inherent conflict between the two major shareholders in the new GM. The workers at GM, mirabile dictu, would like to work. But if the government forces the company to produce cars designed in the offices of congressional staffers and in the west wing of the White House, the chances of these workers actually working rapidly diminish. The UAW, and the elements of the Democratic Party who represent them in the nation’s industrial heartland, will be pushing for GM to produce vehicles people want. The government, and the bi-coastal elements of the Democratic Party will be pushing for GM to produce vehicles that no one who eschews granola and Birkenstocks wants and no one without a Hollywood star’s salary can afford without a massive government subsidy. Since a house divided against itself cannot stand, conflict and federal subsidies designed to mollify that conflict will prevail at GM. Welcome to Government Motors.

I used to think that I would like to own stock in a post-bankruptcy GM, but that assumed that GM would follow the path hewn by Rick Wagoner and Bob Lutz, a course that went a long way toward making the General competitive with its foreign competition and with Ford. But now that the government, the goals of which would be almost completely opposed to those of profit seeking investors, will hold a large stake in a post Chapter 11 GM, I would avoid the new GM like a case of the swine flu.