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Would you invest in the new GM?

By Jack Ward
web posted June 8, 2009

Investors Business Daily (IBD) asked the probing question regarding investing it the 'New' General Motors (GM); "Why invest in a company if your money and rights as an investor can be arbitrarily stripped from you, as they were in GM's case?" IBD was pointing out that President Obama has dismantled two centuries of contract law in his "pre-packaged bankruptcy" of GM. Legal and binding contracts have been wiped out with the GM assets disproportionately distributed favoring the government and unions while leaving investors and dealers holding the short straw. The United Auto Workers (UAW) will receive about 17.5% of the stock for $10 billion of unsecured debts, the bondholders will receive about 10% of stock for the $27 billion in secured debt, and stockholders will get zero.

Where else would unsecured debt be favored over secured debt? It would be cynical to point out that the unions donated millions to the Democrats in political campaigns in this 'pay to play' world. Obama and the congressional Democrats are obligated to save the UAW at the expense of non union jobs and businesses. During a Bloomberg business panel, it was asked what will be the importance of the unions in the next decade. Jack Welsh, former GE CEO, asked, "Give me a highly successful unionized industry." After the panel dodged the question Welsh said, "It's (unions) an inherent killer of competition." Profitability of a company is not an objective of a union. 

Before you celebrate that the bondholders and stockholders got the shaft, ask who they are? Many were retirement funds, and individuals and many lost everything they had invested in GM. In reality, this wasn't a bankruptcy it was the nationalization of private industry.

But it's not Obama's fault. He has said, "…the United States government has no interest in running GM." But Obama is running GM. Obama orchestrated the firing the GM CEO, dictated the terms of the bankruptcy, has decided where the GM headquarters will be, decided which dealers would survive, forbid the import of profitable GM cars from China and Germany, and hand picked a 31-year-old Yale law student, Brian Deese, to dismantle GM. Deese has no recognizable experience in economics, business, or the automotive industry. So why would Obama select him to be in charge of dismantling GM?

The federal government doesn't have a stellar record on managing businesses. The government even lost money when the IRS confiscated and attempted to run the Mustang Ranch bar and brothel. For the government run GM and survive, they will have to build and sell cars that people want. Congress has already dictated the kinds of cars that will be produced. Soon dealerships will display the reincarnation of such classics as Le Car, Travant, Lada, and Yugo. Tiny cars have been available for decades but they have never been popular. To sell the Pelosi GT, the Waxman Super Sport, or the Obamamobile, congress will need to ban all other vehicles.   

 If the people aren't interested in driving these automotive disasters, how will GM ever become profitable? This is the dilemma that investors have. Why should an investor put their good hard earned money into a company that has very little chance of making money? But for the sake of good humor, let's assume that people want to drive 'clown cars'. History shows the profit margin on these cars is small. Why would someone want to be a stockholder in the 'New' GM knowing that the business model is flawed and was it created after the federal government ignored contract law and wiped out the stock value of the original GM?  Throwing good money after bad comes to mind. The goal of an investor is to invest in a profitable company. But the basic goals of the 'New' GM are conflicted with the last and least important goal is to make a profit.

Obama and the congressional Democrats are obligated to save the UAW at the expense of non union jobs and businesses. Devotees of Socialism can rejoice knowing that the workers (UAW) will now control a significant portion of the means of auto production, but will investors think this Government / Union consortium is a good investment?

I doubt it. ESR

© 2009 Jack Ward

Other related stories:

  • Welcome to Government Motors by Daniel M. Ryan (June 1, 2009)
    Daniel M. Ryan is rubbing his hands with glee at the notion of a government-owned General Motors...if only at the hope that some politicians and bureaucrats learn some valuable lessons

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