What's Good for New GM Is Bad for the Rest of America

The measure of success of the General Motors (GM) bailout should not be how fast GM emerged from bankruptcy, but the degree to which contracts are honoured in an impartial process. By this measure, the bailout/takeover is a complete failure, says John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.

  • The bankruptcy courts rubber-stamped a reorganisation plan designed by Obama's "Team Auto" officials that disregarded two centuries of bankruptcy precedent to massively favour the United Auto Workers (UAW) over bondholders.

  • As a result, according to several prominent business academics, the cost of capital will likely experience a significant rise for all U.S. businesses and entrepreneurs who wish to form new firms.

    A look at the disproportionate equity stakes received by the UAW shows the depth of the bondholder robbery that took place. As described by Ross Kaminsky of the Heartland Institute and Rossputin blog:

  • The UAW will own 75 per cent more of the new GM than the investors holding $27 billion of debt to the existing company, even though GM's own bankruptcy filing shows that the "employee obligations" to the UAW are billions of dollars less than the debt owed to bondholders.

  • Bondholders will get 1/6th the ownership stake of the government despite having lent more than half as much money to GM.

    What about the jobs saved? Numbers like "a million jobs" are thrown out, but no one knows what would have happened if the government would have stayed out, says Berlau.

    In fact, as a whole, the auto rescue may result in net job losses, both because of the likely increase in the cost of capital from bondholder treatment, and because of the rapid shutdown of auto dealers that has cost tens of thousands of jobs. In other words, the sales forces didn't have the clout with the Obama administration that the UAW has.

    Source: John Berlau, What's Good for New GM Is Bad for the Rest of America, OpenMarket.org, November 17, 2010.

    For text: http://www.openmarket.org/2010/11/17/gm-ipo-date-set-for-tomorrow-whats-good-for-new-gm-is-bad-for-the-rest-of-america/

    For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 30 November 2010
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