The White House is pushing back hard on the Detroit bailout and insisting on big ownership stakes in the companies. We’re all for that. Inasmuch as we’re saving General Motors (GM) and Chrysler (and Cerberus), we’d like to see the existing debtholders get crammed down, too.
What we’re not for is an oversight plan that sounds an awful lot like a nationalized car industry. If there was ever a way to guarantee that all three US car-makers go belly up, this is it.
The deal, by the way, is not yet done. Which presumably means that it could collapse.
WSJ: Congress and the White House inched toward a financial rescue of the Big Three auto makers, negotiating legislation that would give the U.S. government a substantial ownership stake in the industry and a central role in its restructuring.
Under terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government’s $700 billion rescue of the financial industry.
In the case of General Motors Corp., such a move could give the government a large stake in the company and may hurt existing shareholders. GM is seeking about $10 billion in short-term loans and has a market capitalisation of about $3 billion. The legislation didn’t specify what kind of stock the government would take, leaving open the option it could be preferred, common, voting or nonvoting.
We assume the government isn’t seriously thinking of demanding $2 billion-worth of GM warrants in exchange for its $10 billion loan (which would leave taxpayers with a majority of the company). It should demand this–without the money, GM’s stock will be worth zero ($0) in two weeks–but we doubt it really is.
Here’s the part we’re worried about:
The auto industry would undergo a restructuring process akin to bankruptcy reorganization, only with fewer rigors and with the government, not a judge, in control, and with many associated political complications.
The program would be overseen by an official, tapped by President George W. Bush, whom congressional aides and lawmakers describe as an “auto czar.” This person would act as a kind of trustee with authority to bring together labour, management, creditors and parts suppliers to negotiate a restructuring plan. He or she also would be able to review any transaction or contract valued at more than $25 million.
“We call this the barbershop,” said House Speaker Nancy Pelosi, a California Democrat. “Everybody’s getting a haircut here, in terms of the conditions of the bill,” she said, noting the likely impact on labour, bondholders, shareholders, car dealers, suppliers and executives. “The management itself has to take a big haircut on all of this.”
That all sounds good and fair. But the government is almost certain to screw it up.
Because the government doesn’t have the first idea how to run car companies. A “car czar” will be asked to be a de facto CEO for the industry, but he or she won’t have any real power. Even if there were a clear answer for Detroit’s problems, he or she will not necessarily get any closer to it than Detroit’s managers would.
Communism and central economic planning collapsed for a reason. We hope our government keeps that in mind.
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