Kicking the Tires on the General Motors Deal

Wednesday, June 3, 2009

ON BEHALF of all of us, President Obama has just bought 60 percent of a "new," post-bankruptcy General Motors. The price was $30 billion, in addition to the $20 billion that Washington had already sunk into the firm. Let's slam the doors and kick the tires.

On paper, the nationalized entity is leaner and more competitive. It will shed half of its eight brands, slash a third of the hourly work force and halt production at 14 plants. The company's overgrown dealer network will be pruned. Most of GM's unsustainable debt will be converted into equity. According to the president's auto task force, GM, which has been losing money for half a decade, can break even in a 10-million-vehicles-per-year U.S. market. Right now, sales are running at 9.5 million a year.

The task force considers this the best possible deal, given the vested interests of the various stakeholders and the dire consequences for the feeble U.S. economy of the alternative -- sudden liquidation. The downsizing plan is, indeed, more thorough than the company, its creditors or the United Auto Workers had been willing to countenance previously.

Still, it is not quite the radical change that a neutral bankruptcy judge might have allowed. Fourteen closed plants is two fewer than the task force itself initially wanted, and three of them will not be definitively shut down but "idled." This may give certain auto towns a measure of (probably false) hope. Meanwhile, GM will pay maintenance and other costs. The UAW took a big risk in converting much of its $20 billion retiree health fund claim into stock; it trimmed benefits for retirees, and more cuts are probably coming. But the UAW fund will still get $585 million of the company's cash per year, in the form of a dividend on preferred stock.

Other union concessions were "painful" only by the peculiar standards of Big Three labor relations: At a time when some American workers are facing stiff pay cuts, UAW workers gave up their customary paid holiday on Easter Monday and their right to overtime pay after less than 40 hours per week. They still get health benefits that are far better than those received by many American families upon whose tax money GM jobs now depend. Ditto for UAW hourly wages, though according to the task force, GM's labor costs are now within "shooting distance" of those at nonunion plants run by Honda, Toyota and other foreign firms. Cumbersome UAW work rules have only been tweaked.

Also worrisome was the strong-arming of the company's bondholders, who got far less equity in return for their money than the UAW, the president's political ally. The administration wants to spin GM back to the private sector as soon as possible. But private investors may have been durably scared by the union's display of clout. Indeed, the UAW boasted to its members that it blocked a plan to build GM cars in China and "negotiated new opportunities for UAW involvement in future business decisions."

The ultimate question is whether a state-owned GM can consistently make cars that Americans want to buy, something a privately owned GM has not been doing sufficiently for many years. Ideally, the federal government would make GM's job easier by staying out of business decisions, as Mr. Obama has promised. In practice, the political manipulation of the company has probably only just begun; Democratic Rep. Eliot L. Engel (N.Y), for example, has declared that the government should require GM to install "flex fuel" technology in its cars. If GM still isn't profitable enough to attract private investment a couple of years from now, the pressure will be intense to shovel even more public money into it. Administration officials say they hope and expect that this $30 billion for GM will be the last. But they don't promise, because they can't.

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