

An offer you can't refuse - __
http://www.economist.com/displayStory.cfm?story_id=13610871

======
ccorda
I got into this debate with some finance friends this weekend. This essay I've
seen linked gives a rebuttal:

[http://epicureandealmaker.blogspot.com/2009/05/you-
realithe-...](http://epicureandealmaker.blogspot.com/2009/05/you-realithe-of-
courth-thith-meanth-war.html)

"Think about it. The political stakes for the Obama Administration in the
Chrysler fiasco are monumental...

This leads to my second point. The negotiations over carving up claims to
Chrysler Corporation prior to bankruptcy were just that: negotiations.
Notwithstanding whatever principles of Truth, Justice, and the American Way
the Chrysler non-Tarp lenders would have us believe undergird their positions,
they were simply one party among many to a very complicated negotiation over
the proper distribution of value of a very large and troubled company. Yes,
there are general principles and precedents concerning the division of spoils
in a corporate bankruptcy which normally guide such processes. Yes, many of
these have been laid down over decades of contested and uncontested
bankruptcies prosecuted through our court system.

That being said, none of these precedents are Holy Writ.

The parties to the Chrysler negotiation tried to agree to a prepackaged
division of spoils which they could present to a bankruptcy judge and thereby
speed the company's restructuring. They failed. Did someone—the government,
the UAW, the non-Tarp secured lenders—overreach? Maybe. Does it matter who?
Not in the least. A pre-agreed deal was not struck, so the distribution of
claims to Chrysler will be determined in court, by a judge, who will listen to
advocates for each group argue their case. The process will take longer, and
perhaps introduce additional stresses and strains that Chrysler can ill
afford, but everyone will have their day in court. Even those poor, put-upon
non-Tarp lenders. In fact, even though they would likely be loathe to admit it
publicly, everyone may be happier that the company has fallen into Chapter 11.
That way, each can say to their own constituents that they tried as hard as
they could, but were unable in the end to get everything they wanted. (Chief
among these, by the way, I would place the Administration.)

The corollary point of negotiations is this: they are hard, and often
unpleasant. Parties to a bankruptcy say hard, unpleasant things, they threaten
and cajole, and they use all their powers of persuasion, soft and hard, to
convince the other parties to the deal to give them what they want. In this
context, why should anyone be surprised that agents of the government
threatened recalcitrant lenders with IRS audits, excoriated their behavior in
populist press conferences, or promised to destroy their institutional
reputations in the public eye? The government was simply using the real and
imagined powers at its command to browbeat its counterparties into agreement.
This is standard operating procedure in high-pressure negotiations."

~~~
anamax
> In this context, why should anyone be surprised that agents of the
> government threatened recalcitrant lenders with IRS audits, excoriated their
> behavior in populist press conferences, or promised to destroy their
> institutional reputations in the public eye?

Why do I think that you wouldn't be nearly so accepting if it was Bush or
Nixon instead of Obama.

Actually, it's quite rare for govt to get involved in bankruptcy.

Do you really want to argue that involving the IRS is appropriate?

------
sethg
The article leads with: _NO ONE who lent money to General Motors (GM) or
Chrysler can have been unaware of their dire finances. Nor can workers have
failed to notice their employers’ precarious futures. These were firms that
barely stayed afloat in the boom and both creditors and employees were taking
a punt on their promise to pay debts and generous health-care benefits._

False equivalence.

If I hold GM or Chrysler debt and I perceive that the company is going
downhill, then I can sell off that debt at a discount and cut my losses. If I
spend twenty years working for the company under a contract providing generous
retirement benefits in lieu of money up front, and _then_ I start wondering if
the company will actually be able to afford those benefits, I'm stuck riding
the elevator all the way to the bottom (where "the bottom" is whatever minimal
pension the government can guarantee).

Obviously in a case of insolvency these are both contractual obligations that
the company can't satisfy, and everyone has to take some kind of haircut, but
if the law doesn't give retirees priority over bondholders in this situation,
then the law is an ass.

~~~
yummyfajitas
UAW members did not get generous retirement benefits in lieu of money up
front. They got above market wages up front AND generous retirement benefits.

~~~
sethg
If they hadn't gotten such good retirement benefits, they would have gotten
_even more_ money up front.

Before the Japanese arrived on the scene, these contracts made perfect sense
from the management's point of view, because American car companies were
making money hand over fist. When competition from Japan became serious, such
contracts still made sense, because they would rather pay later than pay now.
And, well, "later" has arrived.

------
patio11
An aside: I really hate people willy-nilly throwing around the word
"socialist", because it leaves me with no good descriptive adjectives for when
the government expropriates several billion dollars from private investors and
hands it to a labor union.

(I assume there must, somewhere, be a Democrat who feels the same about
"racist".)

~~~
sethg
John Scalzi once quipped that in a socialist country, the government
nationalizes _successful_ businesses.

------
akamaka
Lots of pleasant thoughts about fairness in this article, but no mention of
the simple fact that the financial sector has rapidly burned through their
collective reserves of political capital over the last year, and is hardly in
a position to make demands.

~~~
danteembermage
Careful, you've got an abstraction layer that's maybe not appropriate. Imagine
for a moment that I am a person near the end of my working life and very
wisely and prudently put most of my retirement funds in a portfolio of church
bonds, municipal bonds, and long-term corporate bonds including GM's. "The
financial sector...rapidly burn[ing] through their political capital" doesn't
imply that I should get five cents on the dollar while people behind me in
line get forty. I have been receiving a paltry interest rate for years
precisely because I was promised I was first in line in the event of a
bankruptcy.

There are real people behind these massive losses, and the fact that Wall
Street bilked me with transaction costs on the way in to this portfolio means
I'm more deserving of sympathy not disdain.

~~~
akamaka
A lot of people are hurting right now, and you're quite right that investors
both large and small have been hit the hardest. But after a year spent
clamouring for government help, whether bail-outs for big banks or
compensation for individuals who bought ABCPs, investors have lost their place
at the front of the political line.

They still have the judicial branch to turn to, but the days of executive
branch fast-tracking are gone, and there's little point in complaining about
it.

~~~
danteembermage
You're right that losing your place in the front of the political line has
dire consequences, and certainly investors have lost their place at the front
of it, but think really carefully about who was campaigning for government
help and even more important, for whose benefit were the auto bailouts in the
first place.

I think it would be difficult to claim that the answer to either question is
the firms' bondholders. It's true, they may have indirectly benefited if the
bailouts had succeeded, but the purpose of the bailout was never to help the
holders of GM's debt. I don't really think punishing misbehavior should be
pertinent to creditor hierarchy in bankruptcy, but if we intend to punish
clamoring then I think this proposed settlement may have things slightly
backwards.

------
hapless
The government's offer wasn't made in a void. In _exchange_ for re-
prioritizing creditor claims, the government was offering billions of dollars
for debtor-in-possession financing that _is not available from private
sources._

There was no use of force here. The government holds a carrot, DIP financing,
but they don't really have a stick.

------
dunk010
I'm torn on this - on the one hand it's those employees' healthcare which is
at stake - real people and real lives. On the other hand there is due process,
and the risk of making it very difficult for the government to encourage
private investment in the future. If only this had been seen up front - surely
employees' healthcare should have had better protection from the start, but
these things are only obvious in retrospect. Perhaps the government needs to
legislate to force companies to make their employees benefits higher priority
in the case of a bankruptcy.

~~~
gaius
Mutual funds are huge shareholders too. Are those not real people and real
lives?

UAW members have done very, very well over the years, it's about time they
shared some of the pain. What goes around, comes around.

~~~
Xichekolas
> _Are those not real people and real lives?_

As someone else has pointed out, the average retail investor that _might_ own
some GM bonds through a mutual fund would maybe lose a _few percent_ of their
portfolio. The average GM retiree losing his pension/healthcare is looking at
a _near total loss of income_.

That said, I definitely see the legal problem here. The two solutions that
come to mind for solving it are:

1\. Let the retiree VEBA go without the last $10 billion owed it, accepting
whatever that means for retirees.

2\. Have the government pay the $10 billion in cash rather than GM stock.

(Just as a disclosure, my dad is a GM retiree. He gets a $35k/yr pension and
health insurance. His insurance used to be quite awesome, but in the last five
years has become merely 'good'. Best financial decision he made was to divest
his GM stock in November 2003, which at the time was 80% of his portfolio.)

