General Motors filed for Bankruptcy on June 1, 2009 (4) despite the near $50 billion the U.S. Government injected into the company. The U.S. Bankruptcy Court ruling was held at the Southern District Court of New York and discloses the beneficiaries of the bankruptcy that did not include proceeds from the liquidation of the company. Specifically, section 27 of the July 5, 2009 bankruptcy ruling transcript indicates the new owners of the reformed General Motors include The U.S. Government, Canadian Government, Provincial Canadian Government of Ontario, the United Auto Workers, and Indenture trustees. (1)
The impact of the Government bailout on General Motors investors is limited if not worthless in the short run. This is because the new company has to emerge out of bankruptcy into solvency and profitability before its shareholders receive any benefit. As this article illustrates henceforth, the future benefit of the current bailout is not necessarily opportune given the financial losses associated with the time value of money and opportunity cost facing owners of the new company.
Old General Motors common stockholders:
The Government bailout of General Motors has not, and likely will not benefit past common shareholders because 1) the old General Motors company no longer exists and 2) trading of shares in the old General Motors was halted on July 10, 2009. (5) This is because common shareholders are among the last beneficiaries in the bankruptcy process and compensating them would have required liquidation of the company that was ruled against in the July 5th bankruptcy court proceeding. A July 2, 2009 Wall Street Journal article on the matter confirmed that General Motors would not have enough money to benefit commons shareholders of GM (2)
Bond holders in old General Motors:
Investors in General Motors don’t just include common stock shareholders however. There are also corporate bond holders, preferred share holders, mutual fund investors, and debt financiers such as banks. In the case of General Motors, bondholders also referred to a ‘indenture trustees’ were granted a stake of the new General Motors Company stock.
However, until the company becomes profitable again, benefits from the Government bailout will likely be deferred to these bondholders. The opportunity cost for these bondholders is high so their benefit largely, or at least partially amounts to deferred reimbursement of past debt at an unknown future point. In other words, the bondholders in the old GM had their bonds converted into deflated stocks as reiterated by a CNN Money report on the bankruptcy ruling.(3)
The U.S. Government, Canadian Government and the U.A.W.:
Investors in General Motors also fall into another category of pre-bankruptcy and post-bankruptcy. Each type of GM investor was affected by the Government bailout of GM, but in different ways. The post bankruptcy GM investors include U.S. Tax payers via the U.S. Government, the Canadian Government, the United Auto Workers (UAW), and unsecured debtors as mentioned above. These new General Motors investors are essentially buying into the future of the new General Motors.
Financial pros and cons of the government bailout:
Assessing the benefits of the Government bailout on these future bondholders is a matter of weighing forecasted earnings, holding time of investment vs opportunity cost, economic costs to the U.S. and Canadian Governments and their tax payers. Essentially, the government bailout of General Motors is a sunk cost that amounts to financial life support assistance until the company reconstitutes and organizes itself.
Such costs are paid for by U.S. Taxpayers and the U.S. Government insofar as it is an independent organization representing said taxpayers. The sunk costs go to paying off old GM debtors who in a sense may not lose money in their investment if, and when they get paid in full with interest. Clearly, one of the biggest financial losses is to the equity owners of the old General Motors who owned and held large amounts of the stock when it was valued at pre-recession levels. This could have included fund managers, market makers, individual investors, pension funds and more depending on their investing strategies.
Summary:
The U.S. and Canadian Government bailout of General Motors is a sunk cost that are not likely to payoff the new owners of the company in the short run. Old owners of the company have lost money and did not benefit from the bailout. Debtors and bondholders will either receive deferred compensation or ownership in the new General Motors. The benefits of these latter beneficiaries of the bailout depend on how well the new GM succeeds in the future and how quickly it pays old debt.
The benefit to tax payers, if any, may only be realized indirectly if the new General Motors becomes valued at an amount greater than that of the government bailout, plus inflation, plus opportunity cost, plus market risk cost. Much of the heated debate around the government bailout of General Motors is an indicator of the beliefs and sentiment surrounding the financial advantages related to the subsidized preserving of General Motors.
Sources:
1. http://www.slideshare.net/LegalDocs/findlaw-gm-asset-sale-approved-by-bankruptcy-court
2. http://blogs.wsj.com/marketbeat/2009/07/02/gm-common-shares-even-gm-says-theyre-likely-worthless/
3. http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm
4. http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm
5. http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P119359