- The Washington Times - Thursday, November 25, 2010

General Motors Co.’s recent stock offering was staged to start paying back the government for its $50 billion bailout, but one group made out much better than the taxpayers or other investors: the company’s union.

Thanks to a generous share of GM stock obtained in the company’s 2009 bankruptcy settlement, the United Auto Workers is well on its way to recouping the billions of dollars GM owed it — putting it far ahead of taxpayers who have recouped only about 30 percent of their investment and further still ahead of investors in the old GM who have received nothing.

The boon for the union fits the pattern established when the White House pushed GM into bankruptcy and steered it through the courts in a way that consistently put the interests of the union ahead of many suppliers, dealers and investors — stakeholders that ordinarily would have fared as well or better under the bankruptcy laws.

“Priority one was serving the interests of the UAW” when the White House’s auto task force engineered the bankruptcy, said Glenn Reynolds, an analyst at CreditSights. The stock offering served to show once again how the White House has handsomely rewarded its political allies, he said.

The union’s health care and pension trust fund earned $3.4 billion through the sale of one-third of its shares in GM last week. Analysts estimate that it would break even if it sells the remaining two-thirds of its shares at an average price of $36 — close to where the stock traded shortly after the offering hit the market. GM shares closed at $33.45 on Wednesday.

For taxpayers to break even, by contrast, the stock would have to rise to at least $52 and by some estimates as high as $103 — levels that would take years to achieve.

In any event, after selling one-third of its shares last week, the U.S. Treasury has agreed not to sell any more of its GM stock for another six months, while the union fund is free to keep selling its shares.

Through the offering, the Treasury recouped $13.7 billion of its $49.5 billion cash infusion in GM, with another $1.8 billion possible by the end of the year. GM is repaying another $9.5 billion in loans from the Treasury, but that still leaves taxpayers a long way from breaking even.

Union claims ordinarily do not receive such special treatment in bankruptcies.

The generous share of GM stock given to the union trust fund under the White House deal puts it not only ahead of the Treasury but on a par with secured creditors such as banks, which normally receive the most favorable treatment from bankruptcy courts.

Perhaps the biggest losers are the investors in the old GM. None of the bankrupt company’s previous stockholders got any money, while the claims of thousands of investors who purchased the company’s bonds are still being kicked around in a Manhattan bankruptcy court.

“It gives outraged flashbacks to the old GM bondholders,” who remain mired in the bankruptcy proceedings and are unlikely to recover more than 30 percent of their investments, Mr. Reynolds said.

He compared the deal to the corrupt crony capitalism in Russia under President Vladimir Putin.

The White House “took a page out of the Putin political asset reallocation and reward system” when it engineered the deal, he said.

Mr. Reynolds also described the White House deal as a combination of “Boss Tweed on steroids” and “Hugo Chavez on meds,” as far as the bondholders are concerned.

Craig Coffey, a retiree in Nevada who invested $55,000 in bonds in the old GM that are now worthless, was outraged that the union is on its way to recovering all its money before investors get even a cent of compensation.

“We just sat and watched [the stock offering]. We got nothing,” he said. “Screwed again.”

Mr. Coffey has had to make ends meet by finding odd jobs, which can be difficult in the hard-hit Las Vegas area. He said it wasn’t only the union that benefited from getting full repayment to its pension trust fund under the White House bankruptcy plan.

“That was a way for the government to avoid having the liability put on the Pension Benefit Guaranty Corporation,” he said. Bankruptcy courts often discharge corporate pension obligations to the government insurance fund.

“They dodged a bullet there and pushed it back to the union,” Mr. Coffey said. “Now, they’ve made them whole and screwed the bondholders.”

Steve Rattner, the White House auto czar who engineered the deal, repeated the position he took throughout the bankruptcy — that the bondholders would have ended up with nothing if the government hadn’t intervened.

“I think everybody was treated fairly,” he told Bloomberg News last week. “If we had not saved General Motors, those bonds would be worth exactly zero.”

UAW President Bob King celebrated the success of the stock offering last week. “We know that for the long-term viability and success of our membership, General Motors has to be successful,” he said.

He hinted that the union in the next round of collective bargaining that begins next summer may seek to recoup still more of the concessions it made in bankruptcy, given GM’s growing profitability.

“The best outcome is a successful GM that then shares fairly with our membership,” he said.

John Paul McDuffie, a professor at the Wharton School of Business, said the full funding of the union’s pension and health care trust fund through the bankruptcy process represents progress because it helped solve one of most “persistent and difficult” bones of contention between GM and its union.

GM and the UAW had been at loggerheads for years over how to deal with GM’s so-called “legacy” costs — funding the generous worker health care and retirement benefits it promised in earlier eras.

The bankruptcy settlement enabled GM to proceed with a hard-won 2007 plan it negotiated with the union to spin off those huge liabilities and let them be funded in the future by the trust fund that received the stock.

Mr. McDuffie said the bankruptcy also proved useful in forcing the company to learn to survive in turbulent times.