GM Insolvency Can’t be Run-of-the-mill

General Motors, once the backbone of US manufacturing, is officially bankrupt. As you've no doubt heard, the company declared bankruptcy this morning. But since it's 2009, lord knows it can't be a run-of-the- mill insolvency. The Obama administration has its hands deep in this thing... here's the fine print of the biggest industrial bankruptcy in US history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder... leverage it will use to usher GM through bankruptcy and convert it to this "leaner, stronger company" we've been promised
• Half of the UAW's $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM's design/manufacturing activity up north
• Bondholders were bought (bullied?) out. They'll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler's bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs... so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

"GM Bankruptcy to Bring Taxpayer Ownership," headlined Bloomberg this morning. Shame on them and the US government for perpetuating this "taxpayer ownership" BS.

We must have been asleep when the "taxpayer" got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is "Orwellian in the extreme" Addison suggested when we discussed the matter late Friday. Amen.

And let's be really honest... taxes haven't gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any "taxpayers" truly own GM, their tax returns get mailed to Beijing and Tokyo.

Sign of the times... GM and Citigroup are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citigroup is the former owner of Travelers, which it spun off in 2002.

The market had baked in GM's insolvency a long time ago. In fact, the Dow's off to the races this morning, even though one of its 30 components is rapidly approaching zero (the "beauty" of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.

Ian Mathias
for The Daily Reckoning Australia

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