Obama Starts GM National

General Motors is bankrupt? What was once unthinkable has become a reality for the bondholders, who are becoming familiar with the phrase, “Take the money and run!” It is reality for the American government as well, which now has to decide whether to nationalize GM by assuming 70% of the shares of the new entity.

The bankruptcy of General Motors is assured. It should be officially announced in the coming days, attributed to the breakdown of negotiations between the company’s management and the bondholders, who clearly weren’t very interested by the offer to give up their current obligations in exchange for stock options in the future GM, a deadlocked situation that has resulted in the bankruptcy and nationalization of the American car giant.

Indeed, the government plans to contribute up to 70% of the new GM’s capital. Initially estimated at 50%, the American government’s share has increased in order to reassure the United Auto Workers union (UAW), who would prefer to reduce its contribution: it will contribute 17.5%, down from 39%. According to “Les Echos,” the union would have obtained some advantages in return: “6.5 billon dollars of preferred stocks with annual dividends of 9% and $2.5 billion of reimbursable debt until 2017.”

The Hold-Up of the Bond Holders

The bondholders refused to exchange their bonds against stock contributions in the new GM in order to retain the benefits that protected them against General Motors defaulting on its payments. This was a less risky operation than inserting capital in a company whose short-term survival is not guaranteed, and one that should immediately make almost 2.4 billion dollars for the bondholders.

Double or Nothing

Following this rebuke from some lenders, General Motors will be put under Chapter 11 bankruptcy protection, meaning that it will undergo restructuring with judicial oversight. From here, the American Department of the Treasury will take a 70% share of the new GM entity, an act of nationalization in the truest sense of the word. This act of nationalization makes competitors out of American industrialists. Looking to not displease these industrialists, Obama seems resolute on founding GM National, following Renault National’s example, which occurred the day following World War II (even if the reasons for it were different: the French government had nationalized the car company in those days because its owner was a Nazi collaborator.)

A public philanthropy is being cut out of the same bank rescue plans that were drawn up in France. In this case, the socialization of losses means a socialization of eventual profits if it works. Provided that it works!