Taunter Media

The pretense that the General Motors assets are being bought out of bankruptcy by a completely different, unrelated company funded by the Federal government has always been a bit difficult to sustain.  New GM, for example, is making no effort to renegotiate Old GM’s labor contracts, or even to refuse to recognize seniority or other benefits presumably accrued at Old GM.

On the other hand, the dance is imperative for the government’s approach to the proceeding to have even the slightest tinge of the rule of law.  The government’s case hinges on the idea that this new buyer – New GM – has come to the table to buy a specific set of assets from the bankruptcy estate.  New GM just coincidentally happens to be offering the United Auto Workers a very generous stock award that is much larger than the UAW would receive if cash were simply provided the court and divided up according to priority.

Random fluke, has nothing to do with old obligations of GM or the UAW’s stance as a creditor, just a case of trying to create some value for a future critical supplier of labor.  And votes.

We should therefore eagerly await the rationale for including product liability claims accrued by Old GM to transfer to New GM:

General Motors and the Obama administration have reached a deal for the carmaker to assume responsibility for product liability claims filed after it emerges from bankruptcy as a new company, even those claims involving vehicles made by the old company, according to documents filed in bankruptcy court late Friday.

Courts typically allow companies under bankruptcy protection to leave claims behind in bankruptcy and emerge with a clean slate, a precedent G.M. and the government are relying upon. Chrysler, which completed a government-backed restructuring this month, left both product liability claims and unwanted dealers with its old estate, now known as Old CarCo. Claims left behind in bankruptcy generally have a slim chance of being paid.

A product liability claim for an old vehicle cannot in any way accrue to the benefit of New GM; by definition, the car was sold by Old GM.  All the product liability represents is cash leakage from the company – and, to go by the NYT estimates, it is close to $900mm/year (unclear if that accrual represents real cash payments).  So why would anyone voluntarily encumber New GM with the better part of a billion dollars a year in completely optional expense?

Politics.  The victims of product liability claims have a sympathetic case, and it is easy for state attorneys general trying to protect the interests of car dealers to hang their arguments on the far more telegenic victims.  And ultimately, it’s not the Administration’s money.  They just don’t care to try to save it.

The Administration has done a wonderful job steamrolling the judiciary, and I would expect them to continue to find judges who will rule in their favor; no judge wants to run even the tiniest risk of being held responsible for the demise of GM.  But the question coming up is this: if people who were injured by an GM car built by Old GM should get their claims paid at par by New GM, and if healthcare benefits accrued by working at Old GM should transfer to equity in New GM, how exactly is New GM different from Old GM, and why don’t Old GM’s bonds transfer to New GM?  What is the point of a bankruptcy proceeding if every class of claimant has to make a separate petition to Steve Rattner, who pays out based on Rahm Emanuel’s notion of the interests of the Democratic Party?

We will live to regret these games.