Our fiscally conservative government at work

A massive, unsecured loan to moribund General Motors might be just around the corner:

It would be hard to imagine a more risky investment than a company whose own auditors have expressed “substantial doubt” about its ability to keep operating.
Yet the Canadian government is not only lining up to lend billions of dollars to General Motors, whose auditors said Thursday that recurring losses from operations mean it is unable to meet its obligations, but it is prepared to do so without any security or collateral in the event that the company goes bankrupt.
The revelation came during a late-night parliamentary sub-committee hearing into the auto industry on Wednesday, when MPs were able to question Arturo Elias, president of General Motors of Canada. Mr. Elias was asked by Frank Valeriote, a Liberal member of the sub-committee, if it is true that GM had pledged all its assets worldwide to the U.S. government in order to secure the first tranche of a US$30-billion loan, leaving no assets to collateralize the $6-billion loan from the Canadian government.
Mr. Elias confirmed that was indeed the case. “On the security of loans, yes, we have limited capacity to provide guarantees and we have been quite transparent with both the Ontario government and the federal government, as well as Export Development Canada,” he said.
Unfortunately, there seem to be very few alternative options open to the government. The sub-committee also heard from Gerald Fedchun, president of the Automotive Parts Manufacturers’ Association, whose members benefit from the $14-billion GM spends on suppliers in Canada every year. He laid out for MPs what will happen if GM is allowed to fail. “It will take a number of suppliers with it. When those suppliers go… those suppliers will take all the other OEM [original equipment manufacturers] down. In about a week’s time, all of North America’s production of vehicles come to a grinding halt. That’s simply a fact,” he said.
No wonder Tony Clement, the Industry Minister, and Jim Flaherty, the Finance Minister, looked so glum after their meeting with key White House aide Larry Summers in Washington yesterday, to discuss the struggling auto sector.
The government’s best hope is to shift the blame for failure to strike a bail-out deal onto someone else. But who would be dumb enough to scupper the only deal that could save GM and Chrysler? Step right up, the Canadian Auto Workers union…

Damian P.

6 thoughts on “Our fiscally conservative government at work

  1. Gillis says:

    I’m trying to see the logic behind this bailout. A collapse of GM in the absence of an effort to save the company with our tax dollars will have political repercussions. Got it!
    GM chewing up our tax dollars will have commercial repercussions. How many folks like myself we be unable to stomach the idea of purchasing their vehicles?
    No win!

  2. MikeW says:

    Better hope GM goes for a U.S. gov’t backed Pre-Pac bankrupsy. It will save Canadian taxpayers $billions. I am not prepared to believe the doomsday prophsies of the parts makers or other entities. Destructive capitalism works!

  3. John B says:

    The Truth About Cars ran a good series a couple of months ago on how a Chapter 11 for GM might proceed. The series was guest written by a bankruptcy lawyer. You might be able to find through Google.

  4. Gord Tulk says:

    As long as they don’t assume the (open ended pensionliability and make it clear that this will be the only one (which clement has said publically would be the case) I am okaywith it.

  5. John B says:

    Regarding pension liability in Ontario:
    “Ontario’s unique pension-plan safety net that makes payments when companies go bankrupt is teetering on the edge of being wiped out and could fold if a large corporation were to go under soon, experts warn.”
    “Since 1980, the Pension Benefits Guarantee Fund has provided pensioners with up to $1,000 per month in the case that a pension plan fails to provide its full benefit, or any at all.”
    “The program is funded by corporate payments and had been run successfully for decades.”
    “But the report notes it’s increasingly common that companies are reporting high levels of unfunded pension liabilities – shortfalls in funds needed to pay out its pension requirements – and the provincial fund is threatened by a possible “shipwreck scenario.”

  6. Gord tulk says:

    John B:
    That’s the politically sharp point. If the feds do’nt bailout GM the province has a few billion worth of egg on its face.

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