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The US government is set to take a 50% stake in General Motors – could there be a more pointed sign of the absolute collapse of the free market economy?
In its latest filing to the US Securities and Exchange Commission, General Motors has outlined a plan that would hand over 50% of the company to the US government in exchange for the roughly $10 billion USD in government loans handed to GM. The United Auto Workers (UAW) union would get a 39% stake towards their retiree health care fund. If enough GM bondholders agree to exchange their debt for stock (proposed at 225 shares in exchange for every $1,000 USD in debt), they would end up with a 10% stake in the automaker.
Each of these groups, the US government, the UAW, and the creditors would get a seat on GM’s board to evaluate restructuring progress. And, if you do the math, that leaves only 1% of the company for common shareholders – typically the largest stakeholders in a healthy private sector company in a thriving free market economy.
It also raises an entirely different set of questions in regards to possible conflicts of interests. After all, when you have government agencies deciding policy, ranging from mandated fuel economy and emissions regulations to taxation and incentives at one end, while looking out for return-on-investment for tax payer money granted to a for-profit behemoth on the other – things will certainly start to get tricky. However, in a US car market that’s seen the equivalent of 6 million units of car sales (on an annualized basis) disappear, there doesn’t appear to be any other choice. And the collapse of GM just isn’t an option.
As part of GM’s restructuring, it would be forced to kill several existing brands, including the 83 year old Pontiac name, not to mention Saab, Saturn and Hummer – unless, of course, suitable buyers emerge for some of these brands. This would leave GM with Chevrolet, Buick, Cadillac and GMC. What this points to is the fact that a brand must have a strong identity, and firmly stand for something if it’s to be successful and survive. If you look at the brands being axed, they’ve either become irrelevant or mediocre in today’s reality – and there’s just no room for mediocrity anymore. GM CEO, Fritz Henderson, pointed out that these tough decisions were being made to ensure that they only have to go through this process once, and thereafter emerge with a sustainable and profitable business model.
The restructuring plan still faces a huge number of obstacles and challenges – not least of which will be getting almost 90% of GM bondholders to agree to convert their debt-to-equity. And even then, there’ll still be a great deal of pain ahead. A number of plants will have to be shut down, of the existing 6,000+ GM dealerships, over 40% will be closed by the end of next year, 20,000+ factory workers will lose their jobs by 2010, not to mention thousands of others either directly or indirectly. But again, that’s the reality of today.
Let’s hope that Henderson and his team can actually get it done, and what emerges is a sustainable organization that can once again be proud to stand on its own two feet. But it won’t be before a lot more toil and effort! |
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