The Ballad Of Dirty Harry

Go ahead punk, make my day

Go ahead punk, make my day

This week’s news that activist investors are seeking $8 billion in stock buybacks from General Motors has reignited a nearly half century of concerns that the once-dominant automaker continues to prioritize short-term results over long-term strategy. Already behind the competition on global platform rationalization, fuel efficiency, pricing power and luxury-brand margins, GM clearly has better things to do with its cash than give it away to investors. But while analysts and investors wrestle with these issues, taxpayers face an even more troubling question: how is it possible that they lost over $10 billion on GM’s equity only to have Wall Street strip $8 billion in cash from the company with the help of a member of the president’s auto task force?

This question centers on Harry Wilson, the former Blackstone and Goldman Sachs investment banker who led the auto task force’s “deals and diligence team” which did “much of the analytical research that underpins the task force’s policy decisions.” Under Wilson’s leadership, the task force agreed to take huge amounts of GM equity in return for huge amounts of taxpayer cash. When GM returned to public markets, the Treasury sold its GM equity at a more than $10 billion in losses while the firm sat on what it called a “fortress balance sheet” of some $37 billion. And just as the Treasury took its final losses on GM equity, Wilson was already advising activist investors to raid the oversized cash pile he had given the restructured automaker. Now, with his hedge fund forces marshaled, Wilson is promising them $8 billion in stock buybacks in exchange for their support in electing him to GM’s board (not to mention a percentage of the profits).

According to the head of the auto task force, Steven Rattner, Wilson came up with the idea to convert government aid to GM into equity in the restructured automaker and was “passionate” in pushing the idea on skeptical fellow task force members. Wilson bragged to Congress in 2012 that GM’s “fortress balance sheet… [is the] result of the work done in 2009.” In other words, Wilson is directly tied to both the equitization scheme that led to taxpayers’ loss and to the “fortress balance sheet” that he is now raiding with his hedge-fund allies. Taken together, these actions represent a multi-billion dollar transfer of wealth from taxpayers to Wall Street hedge funds with Wilson at the very center.

In his 2012 congressional testimony, Wilson told congress that GM

“has a cost structure and a capital structure that have made it the largest and most
profitable car maker in the world. So I think as long as they keep on the same path, they maintain the same discipline that they now have, I believe the company has a bright future.”

Just over a year later, however, Wilson told Bloomberg News that

“Any company that isn’t efficient about capital allocation is a target for activists. GM has a huge cash hoard and they are generating lots more cash each year, so they need to be thoughtful about that.”

It strains credulity to believe that, in the course of that year, the cash pile that Wilson had gifted GM at the taxpayers’ expense had gone from being a major factor in the firm’s newfound success to being an inefficiently-allocated drain on its value and a target for corporate raiders. In fact, the only thing that had changed was that Wilson was leading the consortium of hedge funds now poised to elect him to GM’s board in return for their share of GM’s erstwhile “fortress balance sheet.”

What is clear is that this scheme would not be possible if Wilson and company had truly improved GM’s ability to turn cash into real shareholder value. Because GM’s “product-led turnaround” has failed to translate into improved pricing power or operational efficiencies, GM’s stock has been largely unable to attract investors who might be interested in its long-term value creation rather than simply raiding its cash pile. In short, Wilson’s scheme isn’t just extremely suspicious it’s also a repudiation of the myth that the bailout really solved GM’s deep operational, organizational and cultural problems. As a result, there’s little to no chance that value investors will try –let alone be able — to stand up to Wilson’s hedge fund cash raid.

This is a problem for GM, which will once again find itself vulnerable to market shocks once its “fortress balance sheet” is raided by Wilson and his cronies. It’s also an absolute disaster for taxpayers who are currently eyeing their latest tax bills and are unlikely to believe Wilson’s Wall Street raiders need their tax dollars more than they do. But most profoundly, this is a nightmare for an Obama Administration that has struggled to convince markets that its policies are rooted in fair play and a level competitive playing field. With the administration’s major economic policy now revealed to be little more than a transfer of wealth from taxpayers to Wall Street, the United States seems to be sliding towards a cynical kleptocracy which threatens not just General Motors but the very foundations of this nation’s success.
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