General Motors announced this morning that it was whacking tens of thousands of jobs, hundreds of dealerships and getting rid of the Pontiac brand of cars (which is too bad because I liked some of the cars Pontiac makes). I can’t see how they avoid bankruptcy. Their creditors for the most part don’t sound very interested in getting pennies on the dollar. It would be better for them, at least I think it would, to force a bankruptcy, liquidate assets and get paid from that. The banks and bondholders would probably get a better deal, and it would be in cash instead of essentially worthless General Motors stock.
There was more news in the article, news that was pretty ominous for taxpayers. Hidden in a single paragraph about halfway through the article is this little blurb that is perhaps more important than the jobs lost or the death of the Pontiac brand…
GM also said it is in talks with Treasury to exchange at least 50 percent of its outstanding U.S. Treasury Debt on June 1 for GM common stock, and could grant the government and a union-run health care trust fund up to 89 percent of its common shares.
Existing shareholders would own just 1 percent of GM under the plan.
So General Motors, recipient of $15 billion in government loans that we were told were necessary to save jobs and stave off bankruptcy, is talking about swapping at least 50% of that $15,000,000,000 in loans from the taxpayers for stock in a company on the verge of bankruptcy. So lets just call it an even $7.5 billion in common stock. Now look at this: General Motors has about 600 million shares trading this morning at about $2 per share. So the total outstanding value of stock in GM is about $1.3 billion. By adding out of thin air $7.5 billion in common stock to the government, that means that the value to the individual shareholders of GM just plummeted. 48% of GM shares are owned by institutions so that means that 52% of the shares, a little more than 600,000,000 shares, are owned by individuals and those shares are about to become virtually worthless. Market capitalization is the sum of the ownership of the company. So based on the current price, and this is WAY oversimplified, General Motors is worth $1.3 billion. If you take the current share prices of $2 and then dilute those with the new shares owned by the government, that $1.3 billion in market capitalization is split not by 600,000,000 shares but is split by 3,500,000,000 shares. That represents an 83% loss in equity for an owner of GM stock.
What also happens is that the government will own five times as much of General Motors as private investors. Add in the union trust funds and what once was the flagship of the American economy is 99% owned by the unions who work there and the Federal government. That means that General Motors will cease to be, by almost any definition, a private company.
What will be left is a shell of a company, amounting to a very expensive jobs creation program like the TVA but making cars instead of building dams. General Motors will become a permanent ward of the state. This will be spun as an unfortunate turn of events, but one necessary to save the economy. In reality I think it is a welcome development for the far left puppet-masters that pull President Obama’s strings. Guaranteed employment for tens of thousands of union workers, a huge company that can be used to achieve social engineering goals, a car company that can be forced to make “green” cars that no one wants and no one buys, but who cares if they are unprofitable because the government owns the car maker and has no incentive to be responsible with your tax dollars. It is so obvious and so brazen, yet no one seems to notice or care and the media certainly is doing what it can to hide the truth: nationalization is proceeding at breakneck speed in manufacturing, banking and health care.
Welcome to the United Soviet States of America!
Long live Chairman Obama!