Monday, April 27, 2009

Uncle Sam's Sovereign Debt Fund to Buy 50% of GM?

Middle Eastern countries, flush with oil cash, have sovereign wealth funds. Uncle Sam's foray into big equity stakes is debt financed. Recall the leverage used by Wall Street and private equity underwriters (PEU's)? It's re-branded red, white and blue.

The federal government began buying equity stakes in banks last fall. GM proposed the U.S.. Treasury own 50%. GM's President said Treasury viewed its stake in General Motors like a PEU investment. I'll second that motion.

GM will dump its Pontiac line and shed another 21,000 jobs. How many billions will taxpayers pay to the company in a reverse economic development move? Uncle Sam is a consistent PEU, giving billions to firms firing tens of thousands of Americans.

The reorganization has plenty of cram down. Treasury gets 50% of equity, while bondholders garner 10%. The United Auto Workers get 39%. That leaves 1% for existing equity holders. Bond and stock holders take it in the shorts.

The Obama government is either a sovereign debt fund or a PEU. Sad days indeed.