Sounding off . . . What am I missing?

May 23, 2009, 11:21 UhrLeo Karl III

General Motors has grabbed more than its share of headlines lately - and many of them not so flattering. The economic meltdown in our banking and financial markets has exposed the Auto Industry in ways that no one could have predicted. The reliance on credit from a wide variety of partners including Material Suppliers, Manufacturers, Logistics Companies, Dealers, and ultimately consumers. The reality is that the Auto Industry in the US is built upon a series of credit backed transactions. And when the banking system began to collapse last year, it brought the auto industry to its knees. It has been well documented that New Vehicle sales in the US have collapsed from a high of about 18 million new units just a couple of years ago to an annualized pace of just 8.5 million units so far this year.

While virtually all auto manufacturers have seen annual sales declines of about 40%, the domestic companies, in particular Chrysler and General Motors, have been brought to the brink Bankruptcy - with Chrysler slipping over already. This brings me to my point - how is it that our current Federal Administration, aka President Obama and his ‘Automotive Task Force’, is dictating how this all plays out? Did I miss something in the last election cycle? When the political machine called out for CHANGE, did they literally mean for us to understand that they intended to Change most of the business principles our great country has been built on? What am I missing?

Let’s look at General Motors. The President’s Automotive Task Force has been pushing for a massive restructuring of GM whereby the UAW would end up owning 39% of the company; the Bondholders would own 10%, the Federal Government 50% and all current common stockholders the remaining 1% of the company. But how do they come up with these percentages?

Currently, General Motors owes the UAW roughly $20 Billion dollars to fund a Union controlled health care account that will remove current and retired union health care obligations from GM and transfer the obligation to the Union. GM also owes about $27 Billion to various Bondholders. These are investors, many individuals, who purchased corporate bonds issued by GM with the promise to pay both annual interest and principal until maturity. And GM owes the US Government about $14 Billion for loans the company has taken from the US Treasury as of today, May 23rd. The company says it expects that amount to rise to about $20 Billion by early June. I realize this is overly simplified, but let’s say that these amounts represent GM’s current liabilities. $20 Billion to the Union, $27 Billion to the Bondholders, and a total of $20 Billion to the US Government. Some simple math says that both the Union and the Government are owed 29% of the total and the Bondholders are owed just over 40% of the total.

So again I ask, What am I missing? In US business law, bondholders are first tier creditors. How is it that President Obama feels entitled to strip the Bondholders interest in GM from about 40% down to 10%, while he feels entitled to enhance both the UAW and the Governments interests from 29% up to 39% and 29% up to 50% respectively?

I do not own any GM bonds. I am not a union member. I am a US citizen who pays my taxes and a voter who expects my elected officials will represent my best interests. I am also a GM dealer. No matter how I look at this situation, I cannot figure out who or what is motivating this cram-down. You have to wonder about a voter payback - did more union votes get cast for Barack than bondholder votes? I am a realist, and I understand that in the current economic crisis bad things are happening to good people. But I also expect that in the United States of America principles of fairness and equality are still guiding our country.

In the end, with my family’s legacy on the line based on our reliance with General Motors to supply us with new product that meets our consumers transportation needs, I certainly hope that the General Motors restructuring happens as quickly and smoothly as possible. The Karl family has represented Chevrolet in New Canaan, CT, since 1927 and we intend to continue doing so well into the future. At no point in the past 80+ years have we ever had product that was as good, as relevant, or as much in sync with our customer’s lifestyle. Chevrolet offers models with top 5-Star Safety Ratings, more models with higher fuel economy than Toyota or Honda, and more choices than any other auto company. From my perspective it is only frustrating that public and media perception lags reality by such a wide margin. And, that my own government has chosen to go where no US government has ever gone before. So with all that, what am I missing?