Tuesday, February 15, 2011

Corporatists to the left of me, whores to the right...

..."Stuck In The Middle With You"
Apologies to Gerry Rafferty and Joe Egan.

There was whining in the letters page of the Lansing State Journal about GM spending millions on Superbowl ads. Oh well, I consider this to be a legitimate business expense. That doesn't mean I like paying for it, but if they are going to sell cars, they need to advertise. The Superbowl is no worse a place to do that than the State Journal. Probably better.

There has been far less outcry regarding GM's plans to pay major bonuses. The average UAW worker at GM is going to get around $4,000: Because GM has been "profitable." I think GM should buy itself back from the US Treasury Department before it pays any bonuses. I'll bet the bondholders who were told to pound sand in 2009 feel the same way.

And let us not ponder the $4,000 direct subsidy for every Chevy Volt built at a loss.

But if none of those expenditures bother you, try this blast from the past. In 2009, when the Feds took scalping knives to Chrysler and GM bondholders, the "new GM" was quietly allowed to carry forward $45 billion in net operating losses. This regulatory undersight will allow GM to avoid paying up to $16 billion in taxes on their "profits."
The Obama administration appears ready to disregard years of precedent in bankruptcy and taxation law as it remakes the U.S. auto industry.

The latest example is the General Motors (GMGMQ) bankruptcy, where the intent is to have a newly created GM assume the benefit of tax losses at the old GM.

The problem, says Jeffrey Coyne, senior lecturing fellow at the Duke University School of Law and a management consultant who specializes in reorganizing troubled companies, is that tax losses can be passed on only to companies whose owners controlled at least 50% of the predecessor company. Since the start of 2005, General Motors has reported losses of about $87 billion.

"You can't form new GM, which has never transacted business before, and sell the assets (of existing GM) and then sell the net tax benefit to the new company," Coyne says. "And as far as I can tell, the NOL is not a saleable asset." An NOL, or net operating loss, can be used as a tax loss carry forward, an accounting technique that allows it to be applied to future profits to reduce tax liability...

The rules are different in the GM and Chrysler bankruptcies because the government is the major financier and a major shareholder...

Coyne said... 'The law is the law unless the government is a creditor.'
Indeed. In 2009 the United States Government bought more than 50% of GM. Then the United States Government exempted itself from its own rules so as to hand even more money to GM the UAW.

We bailed them out. We paid for their Superbowl commercials. We're subsidizing the cars they build. And now we're paying bonuses to the UAW.

Can anybody tell me how bonuses paid to any GM employee are morally different from the bonuses paid to AIG employees that caused so much angst? Well, let me suggest a couple of distinctions:

1- The AIG employees involved had nothing to do with the mistakes AIG made. They did not work in the division that brought AIG to its knees.

In GM's case, the UAW - ably assisted by GM management - was directly responsible for GM's demise.

2- Like the UAW bonus recipients, the AIG employees had contracts specifically including bonuses paid for performance. Those AIG employees achieved their goals - before AIG was bailed out. AIG's bailout would have been much more expensive except for their success.

OTOH, UAW members were handed ownership of General Motors despite the fact they had performed at least as badly as had GM management for decades.

1 comment:

Anonymous said...

Nicely stated.

Worthy of mention, though, is that bonuses were paid to non-UAW employees as well. Of course this is just collateral damage. They could hardly pay off the UAW without taking care of the others; that would be a bit too obvious, even for AP.