GM Nationalization: The Path Not Taken, Choices Still Ahead

The
purported rationale for bankruptcy was to deal with the problem of
recalcitrant bondholders, owed $27 billion by GM and rejecting the
GM/government offer of exchanging that debt for a 10 percent share in
the New GM. It has been apparent for weeks that the bondholder problem
could be addressed with some creative negotiations. By the end of last
week, the government had found a way to be creative; having sweetened
the pot, an accommodation with the bondholders was at hand.

But GM, under the aegis of the auto task force, filed for bankruptcy
anyway, setting in motion a series of likely excessive factory
shutdowns, needless dealership closings and anticipated cancellation of
the rights of victims of defective GM cars.

Given the deal with the bondholders, the bankruptcy declaration was wholly discretionary and avoidable.

But the government had available a much better alternative to avoid
bankruptcy than just cutting a deal with the bondholders. It could have
simply taken complete control of the company.

Instead of declaring bankruptcy on Monday, the government could have announced the taking of GM through eminent domain.

The government could have paid shareholders the market price for their
shares -- worth less than $1 billion. It could have paid bondholders
the market price for their bonds; trading at about 8 cents on the
dollar, that would have totaled a little more than $2 billion. The UAW,
which needs cash not equity to fund its healthcare benefit pool, could
have been given preferred stock paying a substantial interest rate.
(Assuming it could reach agreement on a shared vision for the
restructured GM, the U.S. government could have decided to work in
concert with the Canadian and Ontario governments -- which will control
12 percent of the New GM.)

This would have been an aggressive approach -- but less so than the administration's maneuvers in bankruptcy.

With complete control of the company, the government could have
explicitly set out to manage General Motors in the public interest. As
Ralph Nader has said, this would not require micromanaging the company,
but it would require managing it.

There are many different public management options. Consider the U.S.
Postal Service as one example. It operates independently but under
government supervision, and with some affirmative mandates and
obligations. USPS is required to deliver on Saturdays, for example,
even though it may be more profitable to cut Saturday service. It must
deliver to the entire country, with a flat-rate first class stamp, even
though it would likely make more money with limited service or
differential rates.

A GM under public management would aim for a return to profitability --
or at least breaking even. But it would take into account other public
priorities. And it would focus on medium- and long-term objectives
rather than short-term profitability.

A publicly managed GM would take pains to avoid excessive layoffs and
would not needlessly close dealerships. A publicly managed GM would
abandon GM management's desire to move production for the U.S. market
to low-wage countries. It would maintain decent wages, benefits and
working conditions. It would not maneuver to deny victims of defective
GM cars their day in court. It would prioritize safety in its new
vehicle design.

Above all, a publicly owned and managed GM would invest heavily in new
ecologically friendly technology. As part of a government plan to
remake the nation's transportation infrastructure, it would retool
plants to meet growing demand for buses and trains.

Having decided not to pursue the full public ownership route, the Obama
administration still finds itself about to own 60 percent of the New
GM. This majority stake comes with some important limitations; with a
significant portion of the company still trading publicly (10 percent
immediately after bankruptcy, and more over time), the government will
have legal duties to the minority shareholders.

Still, the government as majority shareholder will have ultimate
control, and the long-term and socially appropriate investment
practices can all be justified as in GM's long-term interest.

The biggest problem is that the Obama administration explicitly
disdains a desire to manage the company to advance the public interest.
Even worse, the administration has stated its desire to begin selling
off the government-held shares in GM in six to 18 months after the
company emerges from bankruptcy; that posture puts a premium on
measures to achieve short-term profitability ... exactly the orientation
that landed GM in its present predicament.