While it looks on the surface as if the situation with GM is out of control, with bondholders and the UAW worried about how the plan will be executed, the government actually has an incredibly strong hand. With Wagoner gone and bankruptcy looming, the Obama administration has far greater control over what happens next. Instead of forking over the $17 billion GM desperately needs to stay alive through the end of the year and hoping for the best, or allowing the company to go under and trigger another economic shock wave, the administration is now in a position to exert considerable leverage over how GM is restructured. Put simply, the U.S. can save GM the way it wants to save GM and ensure a safe, soft landing.
How, exactly, will Rattner proceed? Let’s consider the constituencies: the U.S., which is already on the hook for $13 billion and likely another $17 billion around the corner; the bondholders, who are owed about $40 billion; the workers, who can claim $20 billion in liabilities; and the lowly common-stock holders, with about $1 billion left to hold on to. Given those players’ relative positions, you might think it’s obvious who will come out ahead. The government will want to recover the taxpayers’ investment as quickly as possible, and bondholders will get a sweetheart deal.
But remember that GM is a giant employment and health-care machine, so in this case, policy might trump profits. If the government were to let the bondholders have their way, they would seize the company, break the onerous contracts, fire scads of workers, reduce GM to a small but profitable carmaker the size of a Honda or a Nissan, and perhaps ship most of the parts-building to Mexico, keeping only a GM assembly presence Stateside for appearances’ sake. Even as that plan rapidly gets the money back to the government (and makes the bondholders as whole as they’re apt to be), it would be a total disaster for the administration, which knows that a near wipeout of GM will cause about a million jobs to vanish, including hundreds of thousands in two of the states that already have more than 10 percent unemployment, Michigan and California. For the administration, it is far better to keep GM alive as a giant Works Progress–style automaker, producing cars that might not sell especially well but employing armies of workers, until things get better. Obama knows that if the nation goes above 10 percent unemployment, a whole new round of foreclosures and credit-card and auto-loan defaults will occur, jeopardizing any nascent recovery. GM must be preserved as a big employer at the expense of both management and debt holders.
Viewed in that light, Rattner is especially well suited for the job. As an auto-industry outsider, he can convey the swagger of a new sheriff in town—“Hey, we fired Wagoner. We are tough guys!” As a banker, he can go to the bondholders and say, “Listen, you vultures, you aren’t going to get this company. The U.S. government is going to control this bankruptcy. We can declare the next $17 billion we give the company as a first mortgage, senior to your claims, force you down to some junior-status bonds, and, if you really play hardball, we will make you take some lowly, worthless common-stock position and then have you share it with labor.” Or, Rattner will say to the shareholders, you can play ball and take some sort of government-guaranteed piece of paper that’s worth less than what the Ford holders got, but that sure beats the alternatives, and get them out of the way, permanently improving GM’s balance sheet, without workers taking much of a hit at all.
In fact, under the plan I see Rattner offering, the current common stock would be wiped out or massively diluted, and the workers would be given that equity, in exchange for moderate work reforms and cheaper, less-generous health care. That’s right, it’s possible that the workers will own GM. Obama would be rewarding the most important portion of the coalition that elected him, the unions. He would also be sending a strong message to executives around the country: Align your companies with labor, or you might end up working for it.