GM: A Question of Trust
By Larry Doyle on June 3, 2009 at 8:30 AM in Auto Industry, Current Affairs, Economy, General Motors & Chrysler, Sense on Cents (Larry Doyle blog)
“Trust me.”
Have you ever walked away from a discussion with a person–be it a boss, a business associate, a prospective partner–in which you wondered why they felt the need to make that statement? In regard to trust, I feel much more comfortable when others assert, “you can trust him” rather than an individual asserting, “trust me.” Why? Very simply, trust is a virtue. As such, it is not given like a cheap bauble. Trust is earned. The foundation of our capitalist system is trust. When a basic trust is violated, regulators are compelled to act to rectify that violation.
Let’s enter the Brave New World of the Uncle Sam economy and address the credibility of this virtue known as trust. CNBC recently aired a fabulous roundtable discussion, “The Future of Capitalism,” which touched on many of the economic issues currently debated. In the midst of the discussion, Mohamed El-Erian of Pimco strongly asserted that capitalism is ultimately a system based upon trust. Without trust, investors will not willingly commit capital to drive future economic growth.
As with any virtue, trust is not a one way street. While trust is earned, it needs to be rewarded so as to promote even greater trust. In so doing, the model of trust is displayed as the shining beacon for personal and professional relationships, whether between two people or amongst three hundred million.
Let’s get more specific. Investors who committed capital to General Motors in the form of equity took the greatest risk. In so doing, they positioned themselves to reap the greatest reward were the company to prosper. The company entered bankruptcy; the shareholders got wiped out. That is the way capitalism works. Or does it?
Investors who committed capital to General Motors in the form of senior debt took lesser risk. In so doing, they positioned themselves to receive a lower fixed return knowing if the company failed they would be first in line. They made this investment based upon trust in longstanding rules of bankruptcy proceedings. These investors include large institutions and thousands of individuals. Their trust was violated in the GM bankruptcy proceedings. They were not first in line. Junior creditors, specifically the UAW, received substantially better treatment. What happened? Uncle Sam rationalized this “violation of trust” as being in the common good of our country. Regrettably, this violation received no real debate in our court system and limited debate within our general media.
Uncle Sam, in the persons of Barack Obama and Tim Geithner, have put forth that the automotive situation is a special case; standard bankruptcy proceedings will continue to be practiced elsewhere. I would counter that we have a responsibility to future generations of investors to challenge Obama and team on this point. The future of capitalism itself rests on this debate.
The true costs of this violation will be borne by future iterations of unionized companies that can not easily access the capital markets. I personally would only commit capital to such an entity at a much higher rate of return knowing full well the risks I am taking are now greater given the precedent set via the Chrysler and GM bankruptcies.
Analysts, government officials, and others will continue to rationalize this violation of trust. In my opinion, this rationalization is akin to “the ends justifying the means.” That is a dangerous weapon.
This “question of trust” will certainly be an ongoing theme as we venture further into the Brave New World of the Uncle Sam economy. In the process of making investment decisions, we now need to more aggressively question just how much we trust our counterparties, especially Uncle Sam.
Please share your insights and thoughts so we can collectively be more diligent in navigating the economic landscape.
LD
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Excellent post LD.
They, GM, Obama & Geithner lost any trust they could bargain. And bargained away they did.
And a good lesson was to not trust Obama, too, that he would do this. That is why the banks and Ford pulled back from him.
If people view this Obamamation for what it is an know they cannot trust him, we may stand a chance, putting him in place, until he can be replaced.
The events you describe surrounding GM are stunning to me. I am just amazed that most Americans seem not to care or even notice. If they do, they parrot Michael Moore – fat cats getting what they deserve.
Its never OK for the government to break the rules – even if its for “historic” or “important” reasons. “Special case” smacks of Goeringspeak, the words of a regime running amok, saying whatever sells to the masses so it can do what it likes. Its never a special case. You break it, you buy it.
My feeling is this violation of trust, as you call it, will have a hugely negative long term impact.
That said, I am sure that Obots will continue to blame Bush, talk about Cheney, and not notice or care about much else. And our media will continue to help them along in this endeavor.
I bet this article doesnt receive 25 comments. Thats how much people simply do not notice. Even here.
Isn’t it a shame that people get herded along like cattle and do not bother to question the authorities and their practices.
That said, I am compelled to continue writing and highlighting these issues.
And I appreciate it!
As do I!
Some people are questioning, but they don’t seem to get any exposure, and they seem to get shut down pretty quickly. Just look at how fast the cases against both the Chrysler and GM bankruptcies were shut down (although I believe Indiana may take their case further).
You know, I had coffee this morning at a bookstore near me.
I saw a Prius with a “Question Authority” bumper sticker. It also had a couple Obama stickers (one in hebrew), a Coexist sign and a Save the Earth logo.
This Prius was parked on Park Service lands, on some trees that shade a creek that feeds Rock Creek and is part of the Chesapeake Bay Watershed.
Nobody in the bookstore coffee shop was “Questioning Authority” now that their team “won”. They really seemed to think the current string of events was fine, or somehow Bush/Cheney were to blame (what can Obama do? he inherited a mess!). And anyway who really cares about politics.
Nor do any of them apparently care for the environment, beyond buying a Prius and using it to tear up some forest.
Personal responsibility, not so much. Question Authority, yeah, right.
Sooner or later some of those people will wake up.
http://www.foxbusiness.com/story/markets/market-overview/update–circuit-court-agrees-hear-chrysler-sale-appeal/?test=latestnews
I read everyone of Larry Doyle’s articles, but rarely comment because the US financial system is so obscure to me. It doesn’t help that those in authority seem to want it to be that way. I had to read this article again after reading the comments to understand just what happened. It seems that the Obama administration changed the rules in mid-air and paid off the unions at the expense of, not just individuals, but institutions, who thought they were playing by another set of rules. That part doesn’t surprise me. I firmly believe that this administration is at least the equal of the previous administration, if not worse, in terms of being downright deceptive, meaning evil. I am not so much horrified by the lack of public response as I am by the lack of opposition from people who should know better, starting with the US Congress, and the total, absolute decay and corruption of the media.
And thank you, Larry, for writing these articles. Some of us are reading and DO care, although I admit that most people don’t seem to grasp the enormity of the situation. It is incredible that these idiots have allowed our last large manufacturing industry to be decimated and the shareholders to be fleeced. I can’t imagine what the total cost will be in the end to the people who had investments that were wiped out or to the communities that relied on auto manufacturing and the attendant related industries. It is a sad day for this country. Once the precedent has been set that the “end justifies the means”, it is a short trip down a very slippery slope to the complete dismantling of all of our institutions. And along with the loss of money, trust and jobs comes the loss of our standing in the world and our own belief that the future will be better than the past. Clearly, that will not be the case in Barack Obama’s “Amerika”.
Hey, moderator- my comments keep getting “eaten” and I didn’t say anything bad– what’s the deal??
LD–when a company goes bankrupt, isn’t the order of people who get paid already set in a legal proceeding? Is it in any way up for interpretation, or is it a firm contractual agreement?
I just don’t get this–the executive branch breaking the law. No big time lawyer (it’s a huge class action opportunity), no honest judge–no one can stop this? This looks tailor made for taking all the way to the Supreme Court, if someone is willing.
SNJ, great question. Congress writes the Bankruptcy laws, which seem to protect secured creditors. But if BO gets GM to shaft their secured creditors first… I don’t know why GM just didn’t wait until they went into court to sort this out. I am confused.
I watched a video of the treasurer of the state of Indiana who was very upset by the GM bankruptcy.
LD he echoed your sentiments. What was he going to tell the pensioners that he advised to invest in GM?
He was emphatic that he would never trust the government again and would be much more careful where he invested the retirees monies.
Do Obama and Geithner know, or even care, how many people they have hurt? I suspect the answer is no.
It’s up to 16,000 jobs a day lost since the passage of the Stimulus Bill.
I guess people should have qualified “stimulus”… You know stimulate what exactly? Of course qualifying the “change” would have also been a good idea in retrospect.
Stimulating Obama’s dream of socialism? Um, stimulating the takeover of private sector business by big government? Remember how well that worked at the Mustang Ranch in Nevada?
It certainly seems to be having the opposite effect of what Obama portrayed it would do. But, what can be expected of dear leader?
Anyone owning debt of GM or Chrysler at the end needed to be removed from the gene pool anyway. It’s not like you couldn’t see this day coming for a long time. This is no different than complaining about the debt of the blacksmith industry not being repaid.
Larry,
That was an exceptional analysis and one that has not been brought to people’s attention yet.
The extent of government overreach and legally questionable actions during this economic situation is unprecedented since The New Deal.
We are a country built on legal precedents and the actions now, if they are not contested, will serve to, as you said, to have some fundamental negative consequences to free-market capitalism in the future.
Clearly the bail out of GM was done to cater to the UAW and not to average shareholders who had GM stock even in their 401Ks or mutual funds.
As a functioning entity, General Motors should have had its entities sold off or closed up years ago. It was a terribly run company long before the credit crisis. They mismanaged their brands for decades.
When they came to the government for a bailout, the right course of action would have been to give them nothing and tell them to do what they are doing now. Some of their brands do have value and could have been sold or spun off into a new entity so that shareholders did not have to lose everything and could have tranferred shares to a new entity. Less people would have lost jobs compared to the number of people losing jobs as a result of failed bailouts.
Now you have a company held together by the government (much the same way it was done in socialist countries) and coming out of bankruptcy with much of the same problems they had before.
Larry — thank you for this post. I was wondering about the eventual fallout from this arrangement regarding unions. They seem to’ve gotten their payback from BO for their support in the 2008 election. But I doubt it will be in their long-term interest. You mentioned trust. I think this distasteful agreement will ultimately lead to the dismantling of unions because it destroys any level of trust people had in unions to represent them. I’d appreciate your opinion on this subject since I’m certainly no expert.
There are 2 kinds of people in the world, producers and looters. When a politician can promise free goodies to more than 50% of the population, then you have a country of looters. They elect that politician & he proceeds to hand out goodies to his peeps (looters) and punish the producers through higher taxes & confiscation. Now the producers begin to question why they produce and either quit or move somewhere else.
Then the country falls apart and the looters beg the producers to come back and help them. Why should they? Atlas Shrugged. John Galt
This is no time to give up.
When you hear the dogs coming keep going.
The death of GM is a shock.
Can you hear the slow boil?
Will more news stations notice?
Prolly not because of all the fluff, juvenile infatuation and lack of ethics.
You are going to love this video of the Big One with the king and no one would shake his
bony fingershand. Very Strange.http://mcnorman.wordpress.com/2009/06/04/deliberate-no-hand-shake-to-obama-video/
But he saluted the national anthem today when King Abduhl played it. Makes me so proud that he is trying. Even if it’s fake at least it’s not an embarassment.