Obama GM Strategy a Lost Opportunity
Stephen Diamond: What’s needed is a new transportation strategy; GM still in precarious position
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. On Thursday, November 18, General Motors issued an IPO, started selling its stock. The newly revived company, we are told, is now a success story of sorts. It gave the federal Treasury a chance to unload some of its shares. And Barack Obama said this:
BARACK OBAMA, US PRESIDENT: Today, one of the toughest tales of the recession took another big step towards becoming a success story. General Motors relaunched itself as a public company, cutting the government’s stake in the company by nearly half. What’s more, American taxpayers are now positioned to recover more than my administration invested in GM.
JAY: So the federal government thinks it’s going to be out of GM in two years. They’ve been able to save the company, hand it back to the private sector, and this is a win-win. So now joining us to see if he thinks it’s a win-win is Stephen Diamond. Stephen’s an associate professor of law at Santa Clara University in Silicon Valley in California. He specializes in corporate finance, securities law, labor law, international economic issues. He’s an advisor sometimes to the AFL-CIO. He’s also the author of the book From "Che" to China: Labor and Authoritarianism in the New Global Economy. Thanks for joining us, Stephen.
STEPHEN DIAMOND, ASSOC. PROF. LAW, SANTA CLARA UNIVERSITY: Hi, Paul. How are you?
JAY: So, Stephen, tell me, is this a win-win?
DIAMOND: No. I think some people are winning. The bankers walked away with somewhere between $120 million and $200 million in fees, along with the outside lawyers, accountants, etc. The US Treasury ended up having to sell some of its shares at somewhat of a discount to their original value. I think the original goal was that the company would be valued at $70 billion, and in fact it’s being valued at around $50 billion. Of course, that’s a guess, because it turns out that one of the risk factors in the prospectus says that senior management does not have a good idea about what’s going on inside the company. They admit to having defective controls over internal information. So we don’t even really know whether the prospectus accurately describes the financial health of General Motors. So that puts the company in a fairly precarious position going forward. My particular concern has been over the health of the VEBA, the voluntary employees’ beneficiary association that was set up by the UAW (United Auto Workers Union) and General Motors to manage the health-care plans for retirees. And, unfortunately, their future health, so to speak, is tied to the health of General Motors.
JAY: Now, if I understand it correctly, what happened is the unions took the onus off the companies for managing and being responsible for enough funds to cover the health-care agreements, and the risk was shifted to the unions and their pension fund. Do I have it correctly? And why do you think it might be in jeopardy?
DIAMOND: Right. Broadly that’s correct. That started about three or four [years ago, when] there was pressure by the companies, the big three auto companies, Chrysler, Ford, GM, to shift all of their health-care liabilities to the union, so that the union would have to manage those and make sure that retirees’ health-care needs are met. And in theory the big three were going to provide sufficient assets, close to $60 billion, to provide for the health care of retirees. And over time what they’ve done is basically shave that amount down fairly significantly, restructure it. And rather than providing a structure that’s genuinely independent of the future of the automobile companies themselves, the assets held by the VEBA are linked directly to the health of the big three auto companies.
JAY: Directly to the share price, is it not?
DIAMOND: That’s right, because General Motors–for example, the VEBA now holds warrants on GM stock, preferred stock in General Motors, common stock in General Motors. And even their current assets which are not linked to General Motors have to be managed much more conservatively because of the risks associated with the investment in General Motors.
JAY: And was the union selling off some of its shares at this time as well? Or is it just the governments? I know the US Treasury, the Government of Ontario sold some of–in Canada sold some of its shares. Did the union also sell, or are they holding on to theirs?
DIAMOND: Well, there were four shareholders at the outset in the new General Motors, as you outlined: the United States Treasury; one of Canada’s large government pension funds; the old General Motors; and then the health-care retirement trust, the VEBA that’s managed by the UAW. All those–three of those four entities sold off shares in this offering. The only group that didn’t was the old General Motors, so-called Motors Liquidation Company, MLC. They’ve held on to their shares.
JAY: Okay. So the Obama administration would say, okay, but this is better than bankruptcy, ’cause that’s what the alternative was. What was another alternative that you might have proposed?
DIAMOND: Well, of course, this was bankruptcy. So General Motors went through the bankruptcy structure. And the bankruptcy system in this country was set up–the modern bankruptcy structure was set up in the 1930s as a way to kind of preserve, in theory, the value of a business going forward instead of tearing it apart–and that’s what used to happen prior to the installation of our modern bankruptcy system, more or less, in the 1930s. But the central principle, I think, that should have been applied here was to view the big three automobile companies as a whole, as one major entity, and to think about our overall transportation needs. And what I had proposed was the formation of a public trust company that would manage those assets and transition them to a new transportation system in the United States, and potentially globally.
JAY: Before we explore that further, and I really do want to, let’s just back up one step. So the Obama administration seems to be very proud that they’re going to get out of this in two years and sell off all their shares. But the way things look, even if that’s successful, what do they leave in two years except a company that looks, like, so precariously perched, this could all happen again?
DIAMOND: Right. Well, first of all, there’s no guarantee that they’ll be able to sell their shares and recoup their original investment. They’ve put billions and billions of dollars into this entity, and we have no idea whether they’ll be successful in selling off the rest of their shares. But yes, they’re–will leave behind, still, a company that is in a fairly precarious position. It could reenter bankruptcy; it could be broken up again. It’s already been broken, in a sense, in half, with many of the older assets left behind. The other side of this, of course, is the goal here of management is to globalize General Motors. A substantial part of its production is already overseas. They want to shift more of that to China and Brazil. This is really becoming, in a sense, the US government creating a company for other countries, where there are much lower wages and new growth for automobiles [inaudible]
JAY: Of course, they’ve also driven down the wages here. If I understand it correctly, the starting salary’s gone from $26 an hour to $14 an hour, as some autoworkers say for the first time in the history of the automobile business, workers that work there can’t buy new cars.
DIAMOND: Well, General Motors makes very clear in the prospectus that their current profitability, such as it is, is linked to those types of concessions by the United Auto Workers, and by layoffs of thousands of other employees, and by convincing UAW members to take over control of retiree health-care, even though they did not provide full disclosure to those members about the risks that the UAW was absorbing when it set up the VEBA.
JAY: The other part of this plan, I think, must have been that they thought the current economic crisis is sort of normal business cycle and there’ll be kind of a normal recovery. And if there is, then eventually GM will be worth something, but there’s lots of evidence this is not some normal business cycle. So if the recession continues and/or deepens, what happens to this whole GM strategy of the government?
DIAMOND: Well, I think that’s a very important point, and I think that should make us think of General Motors in a way that we’re also thinking about the financial industry, because essentially I think the government has been far too timid in the way in which it’s dealing with these problems. And just as Obama has been unwilling to do anything more than put in money to the banks, and the banks take the money and then don’t lend it and we don’t have recovery, similarly with General Motors, you know, they were so anxious to get out that they’re not really paying attention to the long-term health of the transportation industry. And that really, I think, has to be the focus.
JAY: So let’s get into what the alternative could have been. So if they’d asked you what to do back when it looked like GM and Chrysler were looking into the abyss–and I guess a lot of people thought Ford was then, as well–what would you have said? What’s the alternative to all this?
DIAMOND: Well, I would’ve taken over all three of the big three automobile companies [inaudible]
JAY: But how could you take over Ford when they weren’t begging for money?
DIAMOND: Well, you could use the pension funds, you could use institutional investors, and you could appropriate private assets that are not contributing to the overall general welfare of the United States. And I think these are constitutional powers that can be exercised by the president or by Congress.
JAY: But the strategy you’re suggesting could have been done without taking on Ford, couldn’t it?
DIAMOND: Well, I’m reluctant to think that there is a solution here with any one company. If we allow these automobile companies to continue to function the way they function, I think we are not going to solve the infrastructure problems that we have. This is a general question about whether or not we’ve got an adequate transportation system, adequate infrastructure. There are energy and environmental issues, of course, international security issues. And when you look at all those aspects of the problem, it suggests that we need a new transportation industry.
JAY: Okay. In the next segment of our interview, let’s talk about what this new transportation system would look like and what a new Detroit and automobile industry might look like. So please join us for the next segment of our interview with Stephen Diamond on The Real News Network.
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