GM (GM) must fire another 21,000 factory workers, as part of a plan to get an additional $11.6 billion in aid from the federal government. The restructuring plan would give creditors stock in the company in exchange for $27 billion in debt obligations. The UAW retirement and medical funds will have to take at least half of the $20.4 billion GM is responsible to pay them in stock. The federal government will convert part of GM’s obligations to it into equity, making the USA, in all likelihood, the company’s largest shareholder. The ultimate structure of any rescue is never certain until it is finished. Bondholders will make a counteroffer, but the plan as it exists now will be the foundation for any solution reached outside of a bankruptcy court.
The entire set of transactions does not make any financial sense. Current shareholders will have only 1% of the company. GM’s market capitalization is $1.25 billion. That means that once all of the debt-for-equity swaps are done, GM should be worth $125 billion. For a firm with rapidly falling revenue and market share and significant losses, that does not add up. Toyota (TM) has a market value of $138 billion. Honda (HMC) is worth $100 billion, according to the stock market. GM is certainly not in the same class as the two large Japanese car companies.
It is clear that the interests of both the UAW and creditors are being badly damaged as part of the transaction, but at least they have some future as shareholders, even if the future does not look bright at the moment.
The people who do not have much of a future are the 21,000 people that GM will fire. They will just be the next in a long series of job cuts in the American car industry. These GM workers will have the special distinction of losing their jobs to get the approval of a government plan to keep GM out of Chapter 11, or, worse, liquidation. Each of them is a taxpayer. Their taxes are going, in part, to make loans to GM. And, GM lays them off so that they are no longer taxpayers.
At some point in the last few months, the system for saving the financial sector, car companies, and the broader economy has become confused. The one clear goal of the Administration stimulus package and many parts of the budget was to save or create 3.5 million jobs. It takes a childlike belief in the ability of the government to control the fate of the economy to think that this will happen while 600,000 people lose their jobs every month. But, noble aspirations often ignore evidence that undermines hope.
Whatever else happens with the GM transaction, if the restructuring is successful, GM gets another $11.6 billion and 21,000 people join the jobless ranks. That is a lot of money in exchange for each person fired. If even a small part of the federal money was invested in keeping these employees at the company during lean times, the federal and state governments would not have to find ways to support all of those who are losing their work. And the car market will recover at some point which means that they will have to hire new workers.
Of course, the government does not look at the math that way, and neither does GM. The company simply has too many people to make a profit with the American car market only supporting the sales of 10 million light vehicles a year.
GM is obviously not the only US company that will take government money as debt or equity and then immediately fire thousands of people in the hope of becoming profitable. These actions create a tortured system that gives incentives for firms to put taxpayers in the unemployment lines where they become the responsibility of the social services system. Many of these people, in particular blue-collar assembly line workers living in the Midwest, are never going to find comparable work, so they will be, in many cases, unemployed or underemployed for the rest of their lifetimes. Not only will these workers have become unproductive but they will become part of the growing costs of running the government, perhaps permanently.
As Congress and the Administration go about their work to try to pull the economy out of this recession, what they build with one hand, they are destroying with the other. Unless the government has that scale weighted perfectly to its advantage, all of the current programs added together will fill in an economic hole only to dig it again, almost immediately.
The government will be part of the process of increasing unemployment by hundreds of thousands of people with its involvement in the auto and financial sectors. The restructuring of the auto industry and its suppliers, which are a substantial part of the overall federal rescue of troubled industries, may cause the loss of over one hundred thousand jobs before the end of the year. What no one in power has explained is how the government’s underwriting of programs that increase unemployment can be a realistic part of a taxpayer-supported system to save the economy.
Douglas A. McIntyre
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