GM a Division of the U.S. Treasury - Part II

This week's Monday Must Read mentions "Inside GM, With the G-Men in Charge," from Business Week. The article looks at how deeply the government has involved itself in GM's day-to-day operations. Interestingly, the Obama administration initially stated it had no interest in running GM's day-to-day operations. The government has done everything from pressuring bondholders to take losses to deciding which brands live or die. The changes are certain to improve GM's short-term financial position by ensuring a steady stream of goverment money, but will likely do nothing to improve the long-term viability of the firm.

The government has shown a willingness to pressure anyone that gets in their way. Bondholders will be all but wiped out by the current restructuring plan and the administration is pressuring them take these losses willingly rather than go for bankruptcy. The insane thing is that many of these bond holders are institutional investors that represent teachers' or firefighters' pension trust funds. They are asking the managers to take huge losses on securities bought with the hard earned retirement funds of middle class Americans. So much for helping out the little guy. Simultaneously, the Obama administration has called for tighter regulation of the financial industry including stronger requirements to act in shareholder interests while at the same time pressuring these funds to volunteer to take huge losses. Something smells foul to me.

The government has had a big impact on which brands will survive. While dropping brands like Saab, Saturn, and Pontiac is probably good for GM, the government pressured them to drop GMC and Buick despite the fact that these are the two most profitable business lines. Buick is a big seller in growing markets like China. Why would the government make such requests? GMC is primarily large trucks, which don't fit with Obama's green thumb. In the middle of trying to help make GM viable the government tried to kill it's most profitable business segment because of political goals. I doubt this ends well. Luckily management held its ground and kept GMC and Buick - though I wonder how long that will last with the ousting of CEO Waggoner.

Actually all Obama has to do is wait if he wants the authority to run GM into the ground. Under the current plans for a post-bankruptcy/work-out GM the government would own 50% of the firm and the UAW as much as 39%. I find it very odd that the government would want to give 89% ownership of GM to the two groups with the worst competitive record in America.

GM might have failed on its own and the result would have been well deserved, but under a combined Obama/UAW ownership GM may indeed live on. The only catch is that it will always be on tax payer life-support, just another federal budget leech.

This all started with a "small" government loan and will end up with nationalization, piece-by-piece. You know what else starts out small and grows steadily worse - a virus.