The debate over the future of GM rattles on. Once again we see the company’s shareholders, and now bond-holders also, crying foul. The latest plan put forward is just not fair, they say.
It is difficult to have sympathy with their argument, however.
A common theme of this column is that for it to work effectively, capitalism needs failure. Failure is the market’s way of deciding which companies have the right products and the right business strategy.
But when inefficient companies are subsidised, the more efficient companies are often crowded out. The vacuum which is created when businesses fail, is often filled by companies with the potential to create new wealth.
It may seem nonsensical to allow a company to go under, with resulting job losses which lead to extra benefit payments, but in the long run you need failure for economic evolution to work.
But the social consequences of letting the world’s big auto-makers go under would be horrendous.
Somehow, a way needs to be found to let capitalism work effectively without creating misery for millions of ex-car-workers around the world.
The latest idea to come out of America is for both bond-holders and workers in GM to acquire equity. Bond-holders will relinquish their debt in return for shares, and workers will give up claims to the healthcare packages which are at least in part responsible for crippling the big US car markers, in return for shares. Or at least an employee benefit trust will acquire the shares. The US Government will then stump up more money.
There is a snag, however. The latest restructuring plan entails bond-holders getting a mere 10 per cent of the company, while workers will get a bigger slug for their sacrifice.
It seems that workers in GM will end up as the company’s second largest shareholders, after the US Government.
Bond-holders are crying foul. A spokesman representing their interests said: “The current offer is neither reasonable nor adequate… Both the union and the bondholders hold unsecured claims against GM. However, the unions would receive a 50 per cent recovery in cash and a 39 per cent stake in a new GM for its $20bn in obligations, while bondholders, who own more than $27bn in GM bonds and have the same legal rights as the unions, would only receive a mere 10 per cent of the restructured company and essentially no cash.”
But it does seem that the bond-holders have missed the point. If markets were left to their own devices, it seems GM would go bust, and bond-holders would be left with next to nothing.
If the government chooses to save the company in order to save jobs, then the rest of the stakeholders surely have neither a legal nor a moral right to anything more than they would receive if the market had been left to do its worst.
© Investment & Business News 2013