Feds Investigate GM For Bankruptcy Fraud, Ignore Own Behavior On Fannie And … – Forbes
The federal government is apparently investigating General Motors General Motors to see if during its 2009 bankruptcy GM hid knowledge of ignition problems which recently spurred an enormous recall. This is a rather surprising case for the federal government to pursue both because of the absence of an obvious remedy and due to the federal government itself having perpetrated more serious fraud than this in roughly the same time period upon investors in Fannie Mae Fannie Mae and Freddie Mac Freddie Mac.
While it is becoming clearer that at least some at GM knew about this problem prior to the bankruptcy, the current GM is not the same company as the “old” GM that went through bankruptcy. Theoretically, parties will have to sue the old company, which has no worthwhile assets, and one would think the Feds would have to try to punish the old company, as well, for acts undertaken while it was the only GM around. Further, if GM had admitted to ignition problems during the bankruptcy, it assumedly could have placed at least some of the costs and liabilities associated with these problems into the old GM that was going bankrupt, thereby insulating the currently operating company from some financial risk.
Thus, it is a little perplexing to imagine what GM gained by the supposed subterfuge and how anyone is going to collect damages or penalties. In California, some class action lawyers are trying in federal court to go after new GM on these issues, but we will have to wait and see if a judge allows that approach.
If new GM can be sued, what is the case? Creditors of the old GM would have received even less if additional liabilities had been disclosed, so they were not defrauded. People who had serious adverse incidents due to the specific ignition issue certainly appear to have cases against GM, but the new GM has done nothing to imply they are unwilling to address those cases. If the new GM tells these people, sorry all the money from old GM is gone and we are not going to pay you, then a bankruptcy fraud would emerge (from the act of hiding from somebody that they are a creditor who should be trying to collect money from the bankrupt company’s limited assets).
Thus, it appears to me that if GM lied in its 2009 bankruptcy case, concealing material information from creditors and investors, the damage is unclear until we learn how GM is going to respond now that the information is out in the open.
The contrast to the federal government’s own behavior vis-à-vis Fannie and Freddie is eye opening.
The Obama administration placed Fannie Mae and Freddie Mac into conservatorship during the depths of the mortgage market meltdown as they suffered billions of dollars in losses on subprime mortgage securities. In 2010 the federal government hatched a secret plan to keep Fannie and Freddie’s future profits forever, even if the government ever recouped all the money it spent to bail them out. Since then, the government, through the FDIC, has three times sold stock in Fannie and Freddie to the public. In none of those cases did the government inform investors that shareholders would never see any profits if they bought the stock from the government. This seems like about a big a fraud as one could commit.
To sell stock, a company (in this case the FDIC) must provide investors and the Securities and Exchange Commission with considerable financial and risk disclosure so that investors can make informed decisions. These details must be truthful and complete or the company risks civil and criminal prosecution.
In complete opposition to such behavior, the federal government sold stock in a company that it believed to have no future earning potential and told nobody. At the time shares in Fannie and Freddie were rising as investors glimpsed some hope that the companies would regain solid financial ground and the government would restore them to their prior status.
It was not until 2012 that the federal government revealed what is now known as the Third Amendment, informing the public that the government planned to keep all of Fannie and Freddie’s earnings forever rather than to let future earnings flow to shareholders after the taxpayers were made whole.
This fraud encouraged buyers to pay higher prices for some of the shares in Freddie and Fannie that the government acquired in exchange for its bailout. This recovery of taxpayer money was accomplished at the expense of investors who trusted the disclosures they received from the FDIC, Fannie, and Freddie, disclosures that the government knew to be untrue. Potentially making matters worse, the Obama administration and Congress may now move forward with a bipartisan plan to eliminate Fannie and Freddie completely, meaning the investors who bought stock from the government in these entities will lose their entire investments.
As reported by the New York Times on March 21, the federal probe of GM’s behavior hinges on “whether company officials failed to tell the government and the public something that it knew to be true.” If that is the standard for fraud investigations these days, one must wonder: where is the investigation into the federal government’s own behavior? We have much more evidence that the federal government failed to disclose relevant information than we do GM.
The federal government’s plan was known by Treasury Secretary Geithner, according to some more New York Times reporting, which is only one step below the top and certainly high enough up to make a securities fraud case open and shut from a layman’s eyes. We do not know yet who knew what when at GM. However, we do know a lot about the government’s opinion of its need to follow the rules. This is made clear by the fact that the investigation into GM’s behavior is moving ahead while nothing appears to be happening in terms of investigating the government itself.
A government that does not follow the law is simply a dictator, in our case a giant bureaucratic monarch. If the government expects the people to obey the law, the least it can do is the same.