GM's taxpayer shuffle

by BD Pisani ♦ 18 nov 2010

The GM announcement of an IPO last August and recently scheduled for today has been heralded by the Obama regime as a victory for government incursion into the private sector. However, as ESPN's Lee Corso is fond of saying, "Not so fast, my friends."

GM's taxpayer shuffle

In Detroit, happy days are here again. General Motors (GM) filed a registration for its Initial Public Offering (IPO) of stock. What a remarkable feat, a tale of Horatio Alger-like proportions:

Bankrupt corporation bounces back to solvency in record time and critical United Auto Workers (UAW) pensions are rescued, thereby saving America from losing out on the wonders of the Chevy Volt. Indeed, this noteworthy recovery was accomplished through sheer entrepreneurial determination, financial wizardry, and American free-market savvy ... no wait ... it didn't. That wasn't GM, that was the Ford Motor Company.

In reality, GM's shaky resurgence only occurred after a $65 billion taxpayer bailout, additional billions in tax breaks not available to other companies, CEO - CEO whack-a-mole, a General Electric (GE) commitment to buy tens of thousands of automobiles nobody else wants, Communist China's banks involved with the IPO, and the Obama regime's pillaging of old GM bondholders and franchise dealers last year.

Throughout it all, one of the few things GM did well was scurry to carry out Obama's "Team Auto" decrees.

IPO sham

There is an entire world populated with financial and investment wizards who know vastly more about IPOs than this author, yet a few basic notions of normal stock issuance seem clear enough to grasp:

1.) A company issues stocks to raise necessary capital to cover the cost of goods to be manufactured for the completion of a product to sell for profit. 2.) These stocks of goods are now the shareholders' equity. 3.) Any share net gain is then: a.) Reinvested to build larger stockpiles; b.) Paid as a dividend; or c.) Disbursed as a combination of both.

However, this is not what GM is planning to do with its IPO. In GM's case they'll issue stock to raise money in order to pay off the government for previous shares bought in repurchase agreements. In other words,"What about old GM shareholders? Never sold your shares and hope you're entitled to buy into the new GM? Not a chance." new IPO shareholders will be purchasing new stock with no starting equity. The money will be going directly back out the door into the hands of the Obama regime as a repurchase (paying off some of that $65 Billion in loans) rather than remain as operating cash.

Furthermore, the new shares will not be common stock, but preferred stock - and offered with a catch. The bulk of the shares are reserved for J.P. Morgan Chase, Morgan Stanley, and other powerful investment banks underwriting the offering. Very few individuals or smaller investment houses will be allowed to play. What about old GM shareholders? Never sold your shares and hope you're entitled to buy into the new GM? Not a chance.

Does this mean that American taxpayers and old GM bondholders, lenders, franchisees, and pension fund investors (you and I) will get their money back? When pig fly.

Investment minefield

There comes a time when reality, even for Obama and the Democrat Party, must be faced. In the real business world, the GM and Chrysler Corporation bailouts are a failure. Reality measures success not by how quickly a company emerges from bankruptcy, but by the degree to which contracts and past debt are honored as it emerges.

Let's look at GM by the numbers:

That puts a smothering damper on any thought of GM as a private-sector entity victoriously clawing its way back into the game through sacrifice, grit, and determination, doesn't it? The GM IPO is not a cause for celebration in America. John Berlau, Director, Center for Investors and Entrepreneurs, has written a detailed article analyzing GM's offer. Here's a bit of what he wrote:

"But how successful and profitable the new GM will be - and there are still many doubts that linger on the company's financial condition and unfunded liabilities - is not the right question to ask if its bailout and takeover were good for the economy. The primary question should not even be how fast or whether taxpayers get their money back (and many experts believe they likely never will recover fully).

The measure of success should not be how fast Chrysler and GM emerge from this bankruptcy, but the degree to which contracts are honored in an impartial process. By this measure, due to the precedent set by the government running roughshod over the contractual rights of Chrysler's secured lenders, GM's bondholders, and dealers franchised to sell both brands of vehicles, the bailout/takeover is a complete failure."

If you want to get a feel for just how sleazy the entire GM/Chrysler deals were, be sure to read Berlau's entire article.

Government-run morass

Many investment analysts now say GM is speeding into its IPO before it has proved that its structural deficiencies are fixed - you know, the myriad and grave mismanagement problems that got it into the bankruptcy mess to begin with.

Despite all of the hoopla, GM still stands for Government Motors and it is partly because of this that GM officials are rushing the IPO. Worse - and troubling for would-be investors - GM admits it doesn't have great control over its finances. It stated as much (along with other serious risk factors) in its stock registration statement with the Securities and Exchange Commission (SEC).

Yet perhaps worst of all, the UAW union has gone from being a perpetual financial drag on the company to part-owner AND drag. This can only end badly. And oh, by the way: Electric vehicles will never save GM unless government subsidies - meaning taxpayer money - is regularly infused via direct loans, tax credits, or foreign interests.

America, don't pop that champagne cork just yet.

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