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.
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.
> if the law doesn't give retirees priority over bondholders in this situation, then the law is an ass.
These bondholders recently made secured-by-real-property loans to GM, Chrysler, and Ford.
Because these loans were secured by real property, that is collateral, they were thought to be safer and thus the rates were lower. (It's sort of like the difference between mortgages or home equity loans and credit cards.)
Without those lower interest rates, the automakers would have gone under years ago. But, that's water under the bridge.
Going forward, if secured lenders aren't first in line, why will anyone make secured loans at lower interest rates?
Heck - why will anyone loan money to a union-dominated industry that is experiencing rough times?
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".)
You know what I hate, the phrase "we're heading down the road to socialism/fascism/whateverism." If we took 2 steps down the road yesterday, and 1 step back today - are we really heading down the road or just trying to get back where we started?
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.
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.
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.
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.
> investors have lost their place at the front of the political line.
That's the shame. They were at the front of a legal, financial line. That one's place in the political line should trump the former is the cause for concern.
I'm pretty sure that my 401(k) is sufficiently diversified that even if its GM and Chrysler bonds turn to kindling, it won't affect my retirement. (The Vanguard Long-Term Bond Index Fund, for example, out of $2.7 billion net assets, appears to have a little over $4 million in Chrysler and nothing in GM.)
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.
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.
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.)
I believe you're saying that the company should exist primarily for the benefit of the employees' health coverage, and secondarily as an entity that takes money and makes something of value.
I might be mistaken though. If you are, is that out of a sense of fairness or sympathy to those who have lost benefits? Are they somehow more deserving of our action than the person who put their life's savings into bonds in a company? ie, is this just an appeal based on current emotion -- how bad it makes you feel about those employees?
"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."
> 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?
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.