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The real reason for the GM/Chrysler bailouts

Or, “How to Earn Better Than 100% On Your Money”

I really have to hand it to Obama.  I underestimated his shrewdness.

Back when the bailout debate was going on, just about everybody who ever even heard of a balance sheet knew that GM and Chrysler were headed for the toilet.  No amount of federal money was going to keep both firms out of Chapter 11.

So don’t do the bailout, the call went.  Don’t throw taxpayers’ money into a hole from which it’ll never emerge.

But you and I were thinking like rational investers.  We had notions like “Return on Investment” in mind.

But Obama thinks differently.  He thinks like a community organizer.  He also thinks about the mission:  Return the nation’s wealth to its rightful owners.  Or, in terms that he himself has used in the past, bring about “redistributive change”.

So if you’re a big-time community organizer and you want to redistribute some wealth at GM or Chrysler, what do you do…well, you know you need a seat at the table to make that happen.  What better way than to have the American Taxpayer pour in a lot of cash and buy your way in for you? 

That way, you get to impose your mathematics of redistributive change all you want:

Bondholders in Chrysler take a hugehaircut.  The union gets control.
Bondgolders in GM get told, “Our way or the zero-value highway”.  The union and their health care plans rule.

But, hey!  Gettlefinger DID in fact make a sacrifice:

From the WSJ:

That’s an improvement on the government’s earlier offer, but it’s a far cry from what the Administration offered the United Automobile Workers for their $20 billion in claims. Assuming the UAW ratifies a new labor agreement, which its locals were voting on Thursday, the union’s retiree benefit trust will receive $10 billion in cash, $6.5 billion in preferred stock paying a 9% dividend, $2.5 billion in debt, 17.5% of the new company and warrants to buy another 2.5% in five years, albeit at a steep price. In exchange, the UAW will accept more flexibility in work rules, and retirees will have to give up prescription-drug coverage for their Viagra and Cialis. Seriously.

Let’s do the math:  For a $20B investment, the UAW gets…

$10 billion in cash
$6.5 billion in stock equity
A NINE PERCENT dividend on the above stock (I’ll do the NPV later on that one, but on the back of an evelope it looks like another $12 BILLION)
$2.5 billion in debt (one assumes they’re being paid interest, too)
17.5% of the company AND the ability to buy 2.5% more later.

So the UAW, for their $20B investment is getting $16.5 billion in liquid equity up front, and a 9% dividend ($585 miilion per year in perpetuity.  That’s 82.5 cents on the dollar right there, not counting the dividend.

They get this AND 17.5% of the company.  And some debt with another interest payment attached to it.  In other words, the UAW just got greater than a 100% return on their money.

The bondholders?  They got the shaft.

Welcome to Obama’s America.  Bend over.

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