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Government Motors
GM's new owner (the Obama administration) should stop bullying the company's bondholders.

Tuesday, May 26, 2009

IN THEORY, a government bailout should provide a short-term infusion of cash to give a struggling company the chance to right itself. But in its aggressive dealings with U.S. automakers, most recently General Motors, the Obama administration is coming dangerously close to engaging in financial engineering that ignores basic principles of fairness and economic realities to further political goals.

It is now clear that there is no real difference between the government and the entity that identifies itself as GM. For all intents and purposes, the government, which is set to assume a 50 percent equity stake in the company, is GM, and it has been calling the shots in negotiations with creditors. While the Obama administration has been playing hardball with bondholders, it has been more than happy to play nice with the United Auto Workers. How else to explain why a retiree health-care fund controlled by the UAW is slated to get a 39 percent equity stake in GM for its remaining $10 billion in claims while bondholders are being pressured to take a 10 percent stake for their $27 billion? It's highly unlikely that the auto industry professionals at GM would have cut such a deal had the government not been standing over them -- or providing the steady stream of taxpayer dollars needed to keep the factory doors open.

GM is widely expected to file for bankruptcy before the end of this month. If this were a typical bankruptcy, the company would be allowed by law to tear up its UAW collective bargaining agreement and negotiate for drastically reduced wages and benefits. That's not going happen. Phrased another way: The government won't let that happen. Still, the threat of a contract abrogation probably played a role in the union's agreement to cost-cutting measures last week. (The details of the deal have not been made public; union members are scheduled to vote on the proposal early this week.) It's never easy for unions to make concessions, but the sting of handing back money is being softened by the government's desire to give the union a huge ownership stake in GM. Might bondholders be more willing to agree to the kind of quick restructuring the government hopes for if they had been treated more fairly from the outset?

The administration argues that it could not risk alienating the union for fear of triggering a walkout that could permanently cripple GM. It also posits that it had to agree to protect suppliers and fund warranties in order to preserve jobs and reassure prospective buyers that their cars would be serviced. These are legitimate concerns. But it's too bad that the Obama administration has not thought more deeply about how its bullying of bondholders could convince future investors that the last thing they want to do is put money into any company that the government has -- or could -- become involved in.

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