U.S. Government Shouldn’t Throw GM Shareholders Overboard

Discussion in 'Current Events' started by stockinvestor, Jun 10, 2009.

  1. stockinvestor
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    stockinvestor Rookie

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    An abundance of people have been critical of the Obama administration for taking a sixty percent ownership in GM in the process of saving the company. All these criticisms are total cheap shots. The Obama administration has done absolutely the right thing in saving GM because it is a good jobs engine for America and an integral part of the America’s manufacturing base which America could not risk losing if it is to maintain its stature as a top world economic superpower; GM is worth forty to fifty thousand middles class jobs directly with double that indirectly America can’t afford to lose these numbers. As for why wasn’t GM taken into bankruptcy last year and this major restructuring begun then before ten plus billion was spent with the same result.occurring, people that make such statements clearly show they don’t know what their talking about. Whether GM went into bankruptcy last year or now they still would have had to go through this process where all the people that have vested interested in GM had to face the reality that they would have to make big sacrifices if the company was to survive. GM had to go through this process where the unions had to give back, dealerships had to go or they would sicken the whole network, brands had to be abandoned so the brands GM would go forward with would be profitable, etc.. If GM went into bankruptcy last year all these major restructuring issues would have turned into major litigation battles with bankruptcy lasting years and consumers shunning GM over fear with GM’s messy bankruptcy, it would have cost the U.S. government much more money than currently projected with the likelihood of GM succeeding long-term as a top U.S. automaker much less likely. As for all these pundits who blast the administration saying their running the automotive industry, their running the banking industry and they want to run other industries, you demonstrate you don’t deserve any respect or consideration when it comes to those remarks on the U.S. automotive industries because you don’t consider the government’s options. The U.S. government has no choice but to take an ownership interest in GM because it has or will have loaned GM $50 billion dollars and there is no way GM can pay such a loan back the loan payments would break the company so the only hope of getting the taxpayers money back is taking equity in GM and eventually selling the equity. As for all this garbage about the White House deciding what cars GM will build this is total nonsense, the White House wants GM to succeed financially there will be no future GM bailouts such bailouts would be politically impossible so the American people can rest assured the White House will not be risking failure here by undermining GM management in charting a course for GM’s financial success. As for the U.S. government becoming majority owner of a major business like GM for a few years it is not world shattering in the financial world people and/or entities temporarily takeover businesses all the time and it doesn’t spell the end of the road for the business; the U.S. government has taken over Fannie Mae and Freddie Mac, the home loan buyers, and those companies haven’t collapsed, it is heavily into AIG, the big insurer, and that business is doing okay.

    One thing that has not really been focused on publicly is how well the new GM corporation will do financially. This GM is going to have low debt, their costs are competitive they have a big bankroll of money. They are planned to be profitable at a U.S. automarket of 10 million cars a year when in all likelihood once the nation clearly gets out of the recession by 2011 the market will steadily grow to 15 million cars a year. With the realistically unsolvable unstable oil prices, people are going to be fleeing internal combustion engine cars and seeking hybrid and electric cars, no doubt about it the U.S. auto industry is set for a long–term modest boom. GM management predicts it will make approximately $8 billion by 2014. A prudent perspective on the value of GM would conclude that GM equity will be the darling of financial advisers, GM with its low debt and low cost structure will be a reliable investment and financial advisers will be extremely eager to diversify their clients into that stock, GM stock will likely be valued long-term at thirteen times earnings not eight or five like the cynics are promulgating. At a earnings of $8 billion and a PE ratio of 13, the U.S. government’s equity will be worth approximately $60 billion dollars $10 billion more than their loan. The U.S. government should commit to not selling their equity too soon and mandate for the first seven years it will only be sold at the break even point.

    What is completely unfair about the GM bankruptcy is how the GM stockholder has been completely cast overboard in this process. It is clear that back in April of this year if not earlier the decision by the Federal Government was made to take GM into bankruptcy to guarantee a good restructuring of GM. The bondholder issues were a sideshow, the government was going to force a GM bankruptcy to break the franchise agreements, gain protection from product liability claims, clean up other liability issues and limit recovery to the bondholders so the U.S. and Canadian taxpayers could have a good chance to recover large portions of taxpayer monies used to help GM. One can’t really fault the U.S. government for orchestrating a GM bankruptcy to guarantee a good restructuring of GM but one can definitely fault the U.S. government with leaving the GM stockholders with nothing. All the major parties that had a vested interest in GM are getting a piece of the new GM pie except the GM shareholders, the UAW is getting something, the bondholders are getting something, the government is getting something. It is not fair and it is unnecessary, the new GM will be profitable enough that everyone can get a piece of the pie. The U.S. government said if the bondholders accepted the government offer, the GM stockholders would end up with 1 % of the new GM. Granted the bondholders didn’t accept the government offer at the mandated 90 % level but they did at the 50% plus level which will result in the bankruptcy Judge mandating it on all bondholders. To be fair to GM stockholders they should be left with a stock value of about $3.00 per share the share value around March of this year before for all practical and intensive purposes the U.S. government made the decision to take GM into bankruptcy and insure a good restructuring. There is good public policy reasons to not wipe out the value of GM shareholders because if this is done than in the future when there is a business that is too big or important to fail and absolutely needs the protections of the bankruptcy system to restructure well and needs the financial assistance of the U.S. government, private investors will bail and stay away from the company for fear the U.S. government will ultimately bring about the loss of their investment and this reality is not good for the well-being of the U.S. economy.
     
  2. Fraulein Hilda
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    Fraulein Hilda BANNED

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    Barack Obama does not care about private wealth. What planet are you from?
     
  3. Toro
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    Toro Diamond Member

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    GM was going bankrupt and the equity was worthless. It was only a matter of time. That Obama expedited this - in a far, far too heavy-handed manner IMHO - does not change this fact.
     
  4. Fraulein Hilda
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    Fraulein Hilda BANNED

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    Expedited my ass. It was only recently he stopped saying bankruptcy was not an option.
     
  5. Toro
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    Toro Diamond Member

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    That does not change the fact that GM was headed for bankruptcy. You just had to be able to read a balance sheet and an income statement to know this.
     
  6. Fraulein Hilda
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    Fraulein Hilda BANNED

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    He led people to believe he was going to save the company, not slash and burn.

    His ineffectiveness streak is alive and well.
     
  7. Toro
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    Perhaps. And he ran over the bondholders for the sake of the UAW, which I think is a bad precedent. But GM had to go bankrupt. The problem is that they probably haven't taken the steps they need to fix the problems and the company will probably be bankrupt again within a decade.
     
  8. Metternich
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    Metternich Federalist Farmer

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    I think your missing Toro's point.

    Path A: GM goes into bankruptcy; Common Shareholders interests are worth nothing.

    Path B: GM gets government bailouts; Common Shareholders interests are worth nothing.

    Don't get me wrong, I hate Obama and what he has done to private wealth; more explicitly, the Senior Bondholders, but when it comes to some equity... Heh, I couldn't care less. It was going to happen, anyone who invested in GM the last 10 years deserves a good blow to the head.
     
  9. HBWilsonDdg7
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    As I understand it, this will set president, and banks that try and bail out a company will now still be set at the bottom of the repayment-ladder. So one must wonder who is going to be willing to take stake in a company that is even slightly ailing. oh oh.. I know.. BHO. Boy are we in for a really bad ride.

    We must change the congress in '10! We need to start now.
     
  10. wimpy77
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    with what republicans who are just as clueless and democrats?
     

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