GM’s IPO - Shame In The System, And A Built In Profit (For The Chosen Few)

General Motors filed an S-1, which is the form required for a company to “go public.” This is odd in itself, as GM still IS public, or at least what is called the “old” GM, the one with all those pesky losses in it and the plants that no one wants.  But meet the NEW GM, the one that had all debts forgiven, was cleansed of any burden from the past, given a fresh start by reneging on all of its debts except those deemed important by the US govt.  This new GM, in filing to sell shares of itself to the public, is embarking on one of the hallmark activities of capitalism.  This filing comes only 18 short months after receiving the largest federal bailout in the history of the country in which capitalism was utterly destroyed, where private investors with a legal claim to assets were told to pound sand in favor those the government appointees deemed more worthy.

The government has chosen banks – yes, those it also bailed out and guaranteed – to participate in the underwriting of the shares, thereby guaranteeing another profit, and has launched a feel good campaign to encourage prospective stock buyers to line up at the trough.  And who wouldn’t?  The situation couldn’t be more favorable.  A badly run company goes billions into debt and can’t possibly survive, but it propped up by the government in the name of, well, something I’m sure.  With a fresh start the company claims operating profits almost immediately.  It’s a miracle!  This company should mint money going forward, right?  Right. 

There will most likely be some gains to be had, especially given that S&P and Dow Jones won’t be able to ignore the new company.  Shortly after it’s IPO, look for the new GM to be added to the two large cap indices, thereby guaranteeing a buying spree, goosing the shares.

If you look under the hood, the facts aren’t so attactive.  None of the money raised for stock will be used to do anything useful.  It will simply be funneled to existing shareholders – the US govt, the unions, and a pittance for old bond holders.  What does this do for the new GM?  Nothing.  The company claims it will throw off the shackles of government control, freeing the company to make bolder, quicker decisions.  That didn’t work out so well last time, and that pesky government control came w/ $50 billion and a get-out- of-jail-free card.  Not bad.

The real meat is in the preferreds.  GM will sell shares of a preferred class that will pay interest.  Anyone with synapses firing should consider these interest bearing certificates as good as US government paper, since the company will still be 50% owned by the government, and the feds have shown a willingness to support the company in the past.  I’d imagine these securities will run up in value dramatically, capturing a hefty profit for whoever owns them.  Oh, that’s right, it will be the same banks that we bailed out, guaranteed, and then gave business to.  Expect the banks to take down the preferreds and then mark them up dramatically.

It’s time to sell the Suburban.

Read the original story at H. S. Dent