Michael Moore's Big Three buyout

Gee whiz, that's how I've felt about the financial institutions, the airlines, and the auto makers.
Rod must be becoming a smart Socialist. Corporate Welfare sucks compared to buying 'em out; booting the management; and nationalizing.

You buy them for $8 billion, and then you have to pump the other $25 billion into them as owner to stabilize them. How can you be sure you'll make back the return on that when you go to sell them in an IPO? You get back the money on a loan too (except in AIG's case).

Although I have yet to hear any in our well-educated media mention it, perhaps the government's ownership of Conrail and sale back to the private sector would provide some lessons.

And can we admit that owners don't RUN companies; they're run by officers chosen by the boards of directors. It really depends on choosing capable people. I have to say -- judging by Obama's picks so far -- I'm gaining confidence that government just might be run more for the peoples' common good than that of the politically connected.

The democrats have to be very careful how they handle this situation. Why? I'll give you three reasons: U. A. W.

Another, thing if its a good idea for the government to be "investing" in the economy, wouldn't it make more sense to invest tomorrow's companies rather than yesterday's? Wouldn't it make more sense to invest in biotech, nanotech, robotics, and so on, rather than on trying to prop up dinosaurs and trying to keep them around for a few more years or decades?

Unfortunately, absent a structured bankruptcy that breaks all existing obligations, there isn't much any management team could do with these companies. From dealer contracts to pension and healthcare liabilites, management's hands are tied. The result is that it costs roughly $2,000 more per unit for the Big Three to roll a car off the assembly line than it does for their competition. That's their margin, unfortunately. Chapter 11 and the renegotiation of all contracts is the only way out.

Pyrrho,

Does a purchase of these firms automatically transfer the liabilities to the new ownership? If so why would Cerberus step up to the plate to buy Chrysler?

Re: Did it ever occur to Moore that for a 'less than $3 billion', you're getting saddled with hundreds of billions more in liabilities?

In regards to pensions and healthcare, the government will be saddled with those if the auto companies go under too.

There is no law forbidding the Fed from open market operations in the equities markets. Nor the real estate markets. Nor the Nevada cathouse market. Nor the Waterford crystal market. Treasuries are just canonical and traditional. And voluminous.

When buying all outstanding shares, one buys what belongs to shareholders, most of whom are not likely affiliated with GM. I haven't gone into their SEC filings to see how many shares are issued/outstanding and how many of those are owned by insiders; but to buy those shares, the government is going to have to deal with millions of individuals who have the power to drive the share price up in the face of a potential suitor. Nobody can force the shareholders to sell.

But say all shareholders tomorrow say they'll sell, at whatever the market price is at the moment they all agree. However many billions taxpayers pay for the stock will not pump one dime into GM - only to the investors. The government will have to install a board of directors, and the board will have to install officers (I would assume taxpayers would like a new management team).

Doing all of this won't alleviate the crunch GM is under. It will have the same liabilities to the same creditors, etc.

Excerpted from Moore quote in Rod's post:

"(You're going to demand collateral anyway if you give them the "loan," and because we know they will default on that loan, you're going to own the company in the end as it is. So why wait? Just buy them out now.)"

I suspect most assets are already collateralized and current debtors' interests in collateral are already perfected by contract and, in the case of collateralized capital assets, filings with governmental entities.

Shareholders stand at the bottom of the ladder of preferences for payment, with unsecured creditors (that would be taxpayers) a rung up. Once secured creditors (a rung above unsecureds) seize their collateral, if liquidation of that collateral is insufficient to settle debts (which it won't be), they will file claims for the rest in bankruptcy court and will most likely be awarded pennies on the dollar. It's not likely that anything will be left for unsecured creditors, and there will be nothing left for shareholders.

There's no upside to taxpayers owning shares. It's better, if we're going to throw money at the problem, to step up a rung as an unsecured creditor, BUT we need to protect not only ourselves but the company we're bailing out by setting some very strong terms. GM cannot continue to operate as it has and expect a different result. The unions are going to have to make concessions, and management is going to have to radically change its expectations in terms of what it's paid. Otherwise EVERYBODY is going to lose.

Michael Moore is talking nonsense. There's no such thing as "the country" he's talking about "calling the shots."

That being said, he's asking a fair question: why pay $18 billion for a $3 billion company (General Motors)?

The folks at Planet Money asked this question a couple of weeks ago; I can't remember which company they picked, but it was valued at about $1 billion then. Less than Foot Locker. The reason to not buy it was that it had something like $46 billion in outstanding obligations, mostly to its pension fund. I don't remember how this number was assembled: it clearly wasn't a single payment due in January, so it was probably something akin to the number used to assess the outstanding obligations of Social Security and Medicaid: an infinite horizon, present value number.

In the old days the Federal Government established the Railroad Retirement Board (which later became part of Social Security) to provide a soft landing for retirees in an industry that was past its prime. I'm not sure the comparison is apt here, though: nobody seems to know what American transportation infrastructure should look like fifty years from now, so it's too soon to say that the auto industry now should be treated like the railroad industry eighty years ago.

But that only deals with one part of Moore's naive three-part formula: someone would still need to "beat them into shape" and "resell them."

The government typically takes the approach that will maximize votes for incumbents. And that usually means doing whatever is necessary to sustain the status quo. I can't imagine the government dismantling the UAW, cutting the automakers' workforce to the bone, and retooling to produce smaller, more fuel-efficient cars. Or rail cars.

It's not that the government doesn't do bold things. It just doesn't do things that cost incumbents votes.

Note that Moore doesn't say how long he thinks it would take to "beat them into shape." Months? Years? And he seems to think this beating would just hurt his baddies: "auto heads" and (inexplicably) "investment bankers." Does anyone think the Big Three can be straightened out without cutting worker compensation? Or cutting workers?

And if by some miracle that could happen, who in his right mind would buy the Big Three three years from now? Ten years from now?

Would you buy a company that wasn't profitable before the government bought it? How about after ten years of government management? Would you, for example, buy your local public school system?

Let's not kid ourselves: the current Congress is just looking for a way to spend just enough money to hand this mess off to the next Congress. And the next President.

Did anyone see the CBS news story last night about the Big Three's lobbying efforts? This is a must-read!

http://www.cbsnews.com/stories/2008/12/03/cbsnews_investigates/main4646424.shtml

Excerpt:
"But nobody's been a bigger advocate for Motor City interests than Dingell. And for him, the stakes aren't just political, they're personal.

"'There's an actual conflict,' said Ryan Alexander of the nonprofit group Taxpayers for Common Sense. 'His personal financial health, you know, the wealth of his family is tied up in the car industry.'

"Dingell's wife Debbie once worked as a lobbyist for GM.

"When she married the congressman, she became a senior GM executive at an undisclosed salary. And we found the couple has extensive GM assets.

"Dingell's current financial disclosure filed in May lists GM stock worth up to $350,000, options worth up to $1 million more, and a GM pension fund. In 2000, among the Dingells' GM assets were stock options worth up to $5 million.

"And in 1998, the congressman reported selling GM stock options worth up to $1 million dollars.

"Dingell wouldn't agree to an interview."

"He eats LOTS of babies."

And I bet he order's a diet soda too.