On Thursday, the New York Post reported that General Motors planned to issue an initial public offering soon. This action represents the government attempting to sell its interest in the company to private investors. The writers of the article point out that in their minds the General Motors bailout was a model of corruption and cronyism.
In 2009 the government bought a majority stake in General Motors for $50. This represents an amount equal to General Motors’ market capitalization in 2000.
The details of the bailout by the government were in violation of normal backruptcy procedures. Bondholders, who loaned GM a total of $27 billion, received 10 percent of the company. The government loaned $50 billion and received about 61 percent.
The article futher reports:
“And the union — in return for the $20 billion that GM owed its health trust — got a remarkable 17.5 percent of the stock plus $2.5 billion in cash plus $6.5 billion in preferred stock carrying a dividend of about 9 percent.
“In other words, the UAW got three to four times as much as the bondholders for a smaller claim on GM’s assets. The union even boasted to its members in May 2009 that it had made no concessions on pay, health care or pensions in the restructuring.”
This was an example of the government choosing favored and unfavored groups. Unfortunately, we are constantly seeing examples of this in the way TARP money and stimulus money is being handed out.
The article wonders if small bondholders who were burned by the actions of the government in the General Motors bailout will be reluctant to invest in companies in the future. Unfortunately, until the Obama Administration revises its policies on how businesses and investors are treated, economic growth may remain slow.