WHEN PRESIDENT OBAMA effectively sacked former General Motors ' (ticker: GM) chief executive Rich Waggoner back in April, pundits declared that Obama was sending a message similar to President Reagan's firing of the striking air-traffic controllers in 1981.
As with the Gipper, Obama was effectively saying there was a new sheriff in town. The parallel is apt, but doesn't go far enough.
Reagan's forceful termination of the strike by Patco in 1981 was a watershed moment that marked an acceleration in the decline of union membership and power.
Now, in contrast to that confrontation, the U.S. government will wind up as a partner with the United Auto Workers following GM's filing for Chapter 11 bankruptcy protection.
Even this cooperation will not shield the union from the necessary changes. Quite the contrary. In bankruptcy, the wrenching changes that seemingly had been impossible will now go ahead.
For better or worse, the government's involvement in terms of billions invested and an outright equity stake in GM, marks an unprecedented involvement by the public sector in what once had been a private company.
The federal government -- that is, U.S. taxpayers -- will wind up with 60% of the ownership of GM after pumping in some $50 billion into the ailing auto maker. The government of Canada and the province of Ontario will get 12.5% of the company for their $9.5 billion infusion
The UAW's retiree health-care trust will get a 17.5% stake in exchange for part of GM's $20 billion obligation to the trust, which will begin to pay retirees' health-care expenses next year. The trust also will receive $6.5 billion of 9% preferred stock and a $2.5 billion note.
The remaining 10% of GM will be owned by unsecured bondholders after a majority of these creditors representing $27 billion obligations agreed over the weekend not to press their claims. Current GM common holders will wind up with nothing, yet the stock ended unchanged Monday, at 75 cents.
President Obama described the federal government as a reluctant shareholder in GM, and the White House said the government would manage its stake in a "hands-off commercial manner." Whether it can stick to its word is another matter.
So far, GM is proceeding with cutbacks that amount to amputations to save the patient. Some 17 factories and parts centers will be shut by the end of 2011. That will mean one-third of GM's factory work force, totaling 20,000 workers, will be let go.
These moves arguably should have been made long ago but, human nature being what it is, were avoided until there was no alternative. Equally arguably, GM and Chrysler could have headed straight to bankruptcy court last year instead of hat-in-hand to Washington since that was their ultimate destination anyway.
That kind of tough love led to the Lehman Brothers collapse, which set off the chain reaction that sparked the meltdown of the financial markets and the severe contraction in the economy. There clearly is no stomach for a repeat.
Moreover, the billions that Washington pumped into GM bought it something that was needed, time. A bankruptcy filing with the economy in free fall, as it was late last year, would have been more disruptive than with the rate of decline decelerating.
At this point, it's slightly ludicrous to bemoan the government's intrusion into the economy. Even before government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE) were placed into federal "conservatorship," the Federal Reserve was pumping billions not just into banks but absorbing some of Bear Stearns' assets. The Troubled Asset Relief Program, the Fed's other myriad lending facilities and the Federal Deposit Insurance Corp.'s insurance of billions of bank liabilities took the government deep into the financial system.
But there is something different in character in taking on such an active ownership role in an industrial company, especially one as iconic as GM. Perhaps Washington will argue that Detroit's problems were a special case when others come pleading for help. What about the network of suppliers to GM and Chrysler that now will suffer?
The potential is for a European-style coalition of stakeholders, with government, labor and corporations having a direct say. That arguably could reduce the pain of short-term adjustments. But it's not capitalism.
Let's see if what is good for General Motors also is good for the country.
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