GM's Bankruptcy - More of the Unfairness Doctrine

Developments in the bankruptcy negotiations for Chrysler and GM are excellent examples of this administration’s definition of the fairness doctrine, as they see it. It all depends on whose shoes you’re wearing. In my last post, the Chrysler bankruptcy showed how the secured lenders got swindled out of their contractual rights under bankruptcy law by government intervention. The GM bankruptcy illustrates the bias treatment of unsecured creditors due to government edict. Both these events violate the basic rules of a free market and the rule of law, which are the basic precepts of our founding fathers and our democracy.

In a conventional Chapter 11 bankruptcy, unsecured creditors are all in the same position and are usually treated by the court in a similar way, depending on their risk level and their importance to the company’s survival. In the GM case, there are three unsecured creditors in question, the bondholders (pension funds, hedge funds, investors) who bought these bonds from brokers, the United Auto Workers Union (UAW) who are owed money by GM as a result of the retiree health benefit trust set up by the company, and the U.S. Treasury who recently shelled out money in an effort to keep GM out of bankruptcy.

The bondholders hold the greatest debt at $27.2B, the union is next with $20B, followed by the U.S. Treasury with $16.2B. The government imposed solution is for the bondholders to get 10% of the ownership from converting their note to equity. That’s less than five cents on the dollar. The U.S. Treasury gets 50% of the stock and $8.1B in debt, as much as 87 cents per dollar, and the union gets 40% of the stock which covers one-half of their note and $10B more in cash over time. That’s worth approximately 76 cents on the dollar. The government and the UAW will own 90% and manage GM. How’s that for fairness? It looks like the private sector comes up short again when the government calls the shots and the guy with the largest claim gets short- changed in a rather disproportionate way.

Tell me, do you think that GM will ever get private investment capital in the future? Would private money readily come to TARP banks that are now being run by Treasury? When politics start to control business decisions, profits become less important. Witness the stagnation of business growth in the Socialist countries of the world. When growth slows the only option a Socialist government has is higher taxes. I’m afraid the cat’s out of the bag unless private interests go to the courts to block these two unfair and unjust bankruptcy charades. We better start standing up about this, because it’s our money that’s at stake. You can’t keep making something from nothing.