GM: Crunching the Numbers

When you crunch the numbers, the GM bankruptcy bailout looks pretty grim:

GM has $90 B in assets and $170 B in debts.  The government plans to put in another $30 B, for loans.  the new company will be a shell of its former self, employing 40 to 50 thousand or so workers once all the plants are closed.  GM has 225,000 workers worldwide and, until today, 90,000 here.  Why spent so much on a shell of a company with a very questionable future?  Given even optimistic estimates for selling new cars, GM is likely not to show a profit for many, many years.  It is likely to go into bankruptcy again, soon.  This is a major government investment for 40 to 50 thousand jobs (less than half the seats in Ohio State Stadium). 
Morevoer, under the new plan, much of the overhanding debt is cancelled in exchange for equity in the new company.  Yet the amount of equity doled out to the various debt holders is very suspicious.  The standard is equality -- all unsecured debtholders with cancelled debt get an equal amounts of equity relative to the debt cancelled.  This equality standard has been, as many commentators have noted, trashed.  Workers unsecured claims get four times the value of the unsecured claims of all other creditors.  Taxpayers as current debtors get less, ceding much of the value ot their equity claims to the UAW.   In essence, taxpayer and bondholder money has been shuffled into the UAW.  

Comments

[Eric Rasmusen]

Maybe the different classes of debtholders are actually being treated equally. The union is getting 4 times the number of shares per dollar of debt, but if each share has a value of 0, it all comes out the same.

Do you know of an article that actually explains the numbers? If the assets are worth $90B and the debt is being reduced from $170B to $0, then it won't take years before the company becomes profitable; it will be profitable immediately.

If, somehow-- maybe because pension liabilities are not being turned into equity or something like that--- the debt is being reduced to $100B, then the new shares are worth about 0. They have option value if the debtholders can't shut down the company immediately, so the shareholders can do some gambling, but no value if the debtholders can stop dissipation of the assets.

[Stephen Givens]

If my math is correct $30 billion to save 50,000 jobs is $600,000 per job. Can anyone tell me how I can join the UAW?

[KenB]

"Maybe the different classes of debtholders are actually being treated equally"

I can't quibble with the argument that 1% of zero is equal to 20% of zero, but that's not the way the UAW or the Obama administration look at it. They think, however fatuously, that the restructured GM has value. Thus, whether or not they succeeded in preserving value in this instance, they've established the precedent that ordinary legal rules can be brushed aside with political muscle. This is now a different country from the one in which I have heretofore lived.