GM and Harry Wilson: Corporate raiding in the 21st century

GM and Harry Wilson: Corporate raiding in the 21st century

The collapse of GM meant disaster for thousands of auto workers, it also meant opportunity for corporate raiders like Harry Wilson.

In 2005, General Motors, one of the hallmark institutions of the American economy, stopped making a profit. By the first quarter of 2009, the company, home to such brands as Buick, Cadillac, and Chevrolet, lost more than $90 billion. With thousands of jobs on the line and the future of American manufacturing looking bleak, the US government stepped in. Attempting to save GM from total collapse, newly elected president Barack Obama created the Auto Industry Task Force with the intention of having the ad hoc group oversee a bailout of the company. The task force was small, and was primarily made up of cabinet members and top level government functionaries such as Larry Summers. On this list was also included a senior Treasury Department advisor by the name of Harry Wilson. A former investment banker with Goldman Sachs who retired at the age of 36, Wilson was picked to head the Task Force’s “deals and diligence team,” responsible for the financial analysis of GM. While in charge, Wilson became intimately familiar with the financial status of the company, knowledge that he would put to good use as we will see later on. Now, in order to save the company, Wilson and the rest of the Task Force decided to give GM $49.5 billion in taxpayer funds. As a part of this bailout, the United Autoworkers Union was forced to agree to a number of supposedly “temporary” measures, “allowing GM to reduce labor costs by $11 billion. There were 21,000 layoffs; a wage freeze for current workers; a halved wage of $14 per hour for non-core new hires; elimination of a funding program for unemployed workers; a no-strike agreement until 2015;” and cost cutting by shifting “retiree healthcare and pension benefits from GM to the UAW, saving the company $3 billion per year.”

Right around the time that Harry Wilson was helping to craft this bailout and forcing the UAW to make concessions, he approached a number of investment banks with an interesting offer. Citing his intimate knowledge of GM, Wilson convinced the banks that they could collude in first of all purchasing large shares in GM, and then using their combined leverage to force GM into taking drastic measures to inflate its stock price. The banks would benefit as major GM shareholders, and Wilson would benefit as not only a shareholder but also from commissions he would receive from the investment banks for increasing GM shares.

To give a more detailed explanation, what Wilson proposed was that first of all the banks would buy large shares of GM stock. They would also loan Wilson money so that he could establish himself as a major GM shareholder. Next, after purchasing a large share in GM, Wilson would use his leverage to start a campaign amongst shareholders to force the company to make further cuts to labor costs, and to use a substantial part of its revenue stream to purchase shares of its own stock. The investment banks that Wilson had convinced to buy in to GM would then rally behind Wilson, never revealing that they had already struck a deal with Wilson behind closed doors. By cutting labor costs and buying back the company’s own stock they would artificially inflate the stock price, benefiting themselves as shareholders.

This was the plan, and this is exactly what happened. The banks and Wilson purchased a large stake in GM and they kept their plan secret. Thanks in part to Wilson’s aggressive lobbying, GM shifted its operations to places like Mexico and China in order to cut labor costs. The “temporary” concessions that the UAW agreed to under the Obama administration became permanent. Simultaneously, GM agreed to spend $5 billion on stock buybacks in 2015, a number which they increased to $9 billion in 2016 .

So to recap, Wilson helped craft a bailout of GM which used US taxpayer money ostensibly to save US jobs and help the economy. He also helped force the UAW to agree to massive concessions resulting in the layoffs of thousands and large wage and benefit cuts for those who remained all in order to save GM $11 billion. But he then turned around, became a major shareholder in GM, and along with other investment banks forced GM to buyback $9 billion of its own stock while simultaneously undermining the whole point of the bailout package by getting GM to offshore its operations to China and Mexico.

For its part the Obama administration did nothing, and why would they? Stock buybacks are perfectly legal, at least they have been since 1981 when an SEC official by the name of John Shad changed the meaning of stock manipulation, opening the door to this practice. Right around this time the pay packages of top company executives became tied to the company’s share price and stock buybacks proliferated. GM itself engaged in $20.4 billion worth of buybacks between 1986 and 2002. “If they had saved that money and earned a modest 2.5% on it, the company would have had $35 billion on hand when the financial crisis and Great Recession hit and probably would not have had to file for bankruptcy protection.” Instead, the money was distributed to shareholders. Stock buybacks are becoming so common that between 2003-2012, of the 449 companies listed on the S&P 500 index, 54% of profits were used to buyback the company’s own stock .

Without any unified response from the people of this country this practice and others like it will continue unabated, and criminals like Harry Wilson will run the country instead of rotting in prison.