Not content with the hole it now occupies as a result of denying the obvious solution to the GM conundrum, the government plans to grab a bigger shovel and dig harder. 

Bloomberg is reporting tonight that the Obama administration is considering swapping its existing debt for equity in a new, supposedly slimmer and profitable GM that would emerge from bankruptcy. The logic according to the article is that if the government swaps its more senior debt it will put pressure on the other creditors and the union pension fund to negotiate. Unfortunately, bankruptcy proceedings often develop a life of their own in which reason and logic can become seriously twisted.

Quoting a source, Bloomberg says that the union pension fund and the government would end up with most of the new equity while the other bondholders would receive only a sliver. They give no background or reasoning for that statement so take it for what it’s worth.

Even if the other creditors end up with more than just a “sliver” the unions and the government will almost certainly control the company. From that we are expected to believe that a low cost, highly competitive world auto company will evolve. You may perhaps be envisioning a different scenario.

The government is averring that it will seek to sell its equity position if indeed it ends up with one. One is left to wonder who in their right mind would want to buy a car company in which your fellow shareholders are the unions with which you must negotiate. Maybe we can dupe the French into that one.

The consequences of all of this go far beyond GM. How does Ford compete with the cost advantage a government owned GM would enjoy? What clever plots does Congress come up with to force the non-unionized foreign manufacturers into the arms of the unions? Will government bow to other constituencies and dictate the nature of the product that GM turns out? If that comes to pass will they rig the game to force all others to follow along?

Government owned car companies have a checkered history. Just ask anyone who bought a Renault once.