Obama worse than Kissinger?

[chequita guevara]

Yes, the best prescription for the American auto industry is to give the UAW even more control over the companies.

1% control would be more control than they have ever had.

[Drake Tungsten]

In bankruptcy proceedings, creditors (which includes investors) have first dibs at the carcass. Workers are at the bottom of the pile.

At least che understands how bankruptcies are supposed to work...

The government stepping in means it has gone completely up in flames. The government then dictates who gets what...

The government shouldn't be doing this in the first place. We have well established bankruptcy proceedings for a reason.

[Arrian]

They've had significant bargaining power over the years, Che. Don't be ridiculous. I know it's hard.

By the way... wouldn't it be better to put the union in charge and let them have to make the hard decisions? Either they get it right or their failure is theirs alone?

-Arrian

[Jon Miller]

I am not sure why established bankruptcy proceedings aren't going on.

However, the government being involved how it is definitely isn't standard proceedings and the parties can't assume that they will receive the standard results.

If they had acted to make sure the government wasn't involved, then they would never have reached this situation.

JM

[Jon Miller]

Basically, if you are an investor and you let a 'too big to fail' corporation/etc fail... then you are asking for nonstandard resolution as the government will become involved.

Same with managers/workers/etc.

Government involvement is nonstandard, and has nonstandard results.

JM

[Drake Tungsten]

I am not sure why established bankruptcy proceedings aren't going on.

Isn't it obvious? Obama wants to circumvent normal bankruptcy proceedings so he can protect the UAW, a powerful Democratic special interest group.

Basically, if you are an investor and you let a 'too big to fail' corporation/etc fail...

Chrysler isn't "too big to fail", JM. Not by a long shot. Don't believe it.

[Jon Miller]

Once they saw that the government was getting involved, they should have known it was time to get out (if the problems weren't going to be fixed shortly).

This was months ago.

JM

[chequita guevara]

They've had significant bargaining power over the years, Che. Don't be ridiculous. I know it's hard.

Bargaining power isn't the same thing as controlling the company. The union has no say over where plants are opened, what lines of vehicles are produced, etc. There was a time when they could block the closure of a plant, but that is long gone.

The only influence the unions had was on benefits, working conditions, and pay. But they didn't have control.

[Drake Tungsten]

Once they saw that the government was getting involved, they should have known it was time to get out

How exactly were they supposed to "get out", Jon?

[Jon Miller]

Sell their shares on the market if they were shareholders.

If they were loaning to Chrysler, then they should realize that their loans could possibly be worth nothing and take appropriate action.

Force a change of operation if they had enough control ove Chrysler.

JM

[chequita guevara]

Once they saw that the government was getting involved, they should have known it was time to get out (if the problems weren't going to be fixed shortly).

This was months ago.

JM

You can't get out if no one will buy.

Neither are creditors required to save a company in which they've invested. They have every right to cut their losses and let an investment go down without throwing good money after bad.

Drake spins this as saving an important special interest group (workers are a special interest group ) and that may be true to an extent. More likely, the harm to the economy that would be done by letting Chrysler and GM fail are weighing heavier. The economy of Michigan would be destroyed, and everything which is attached to Michigan's economy would be hurt pretty badly.

Drake ignores the fact that letting one company go isn't simply letting one company go. All the suppliers would be crushed. All the dealers would be crushed. All those who sell goods and services to the workers would be crushed. From there it would ripple out like a tsunami. The impact reaches far beyond Chrysler.

[DanS]

Don't want to put words in JM's mouth, but I think what he is saying that it doesn't matter whether the government is following the law or not. It's AOK that these bondholders get shafted.

[Drake Tungsten]

Sell their shares on the market if they were shareholders.

These aren't shareholders, JM. You don't even know what you're talking about.

If they were loaning to Chrysler, then they should realize that their loans could possibly be worth nothing and take appropriate action.

Like what? The appropriate action is to prepare to defend your rights in the bankruptcy proceedings...

Don't want to put words in JM's mouth, but I think what he is saying that it doesn't matter whether the government is following the law or not.

Seems that way.

[Jon Miller]

You ignored the rest of my post. You can transfer loans to other parties as well.

Sure, it won't be worth much. It isn't worth much now either, is it?

Don't make loans to bad companies in the first place. Risks like this is what make loan companies act responsibly.

JM

[Arrian]

A defense of the process:

http://www.newsweek.com/id/195941

Since last week's announcement of the deal to put Chrysler into bankruptcy and give a chunk of equity to the government and a majority of it to the United Auto Workers, some investors have cried bloody murder. Chrysler's secured bank debt was held by large banks that have been the recipients of federal bailout funds and by smaller investment firms, many of which bought the debt at a discount. It was these smaller firms that President Obama lacerated last week, blaming them for greediness that prevented a better deal. In a normal Chapter 11 filing, their claims on a failed company's assets would be paramount, above the claims of unsecured creditors such as, say, the union health care fund or employee pension fund. But the smaller investment firms say the government tried to strong-arm them into accepting a debt-for-stock swap that would have shortchanged them.

I'm empathetic but not sympathetic to these smaller investment firms. The Chrysler deal, midwifed and financed by the government, does upend the traditional order and sets a precedent that, were it to be repeated, would be dangerous. In ordinary times and circumstances, there's no justification for the government to intervene in a way that privileges unsecured lenders over secured lenders. But the times and circumstances surrounding Chrysler aren't ordinary.

Why give a union pension and health care fund—or any unsecured creditor—better terms than secured bondholders? There are a few reasons.

First, the bank lenders always could have opted out. Chrysler employees couldn't. Over several decades, Chrysler's employees lent a big chunk of their labor in exchange for contracted health care benefits and payments. But there's no secondary market for these types of claims on a company's assets. The employees couldn't cut their losses and sell their pension rights to a third party. Nor could they hedge by trading options or buying credit default swaps. By contrast, holders of bank debt and bonds weren't long-term lenders. They may have jumped in last year, or last month, looking for a quick trade. And when it didn't work out, they had an easy out: sell the debt to another investor.

The debt holders, of course, would say that this is how capitalism works: People willing to assume different types of risk and willing to purchase certain assets in a private market get the legal claims that come along with them. And the government shouldn't get involved. But that argument holds up only so long as you believe that what's been going on with the car companies and in our financial sector is private-sector capitalism. I don't.

Chrysler debt holders have already benefited from taxpayer largesse. The extension of federal loans last year helped support the market value of Chrysler's debt. The extent to which Chrysler was able to stay current on any of its debt over the last few months was because of the federal credit.

The price of distressed debt is dependent on what traders believe they'll be able to recover—i.e., how much the company will be worth after it legally sheds certain debts in bankruptcy. Debt holders can recover in two ways. Companies can reorganize, transfer ownership to the debt holders, continue as going concerns, and emerge from bankruptcy. The recovery comes down the road when the former creditors sell their equity. Or companies can liquidate—wipe out their debt, sell off property and other assets, and distribute proceeds to the creditors. In the case of Chrysler, either path to recovery would require a significant influx of taxpayer money. Companies in bankruptcy require new debt—known as debtor-in-possession in financing—so they can keep the lights on. That market is not functioning particularly well since (irony alert!) so many banks are themselves in danger of bankruptcy. And so, in the case of Chrysler, the taxpayers are providing up to $4.6 billion in such financing.

Liquidation is an option, of course. Instead of fixing up the house, you could sell it in its current state to the first available buyer or break it down and sell the plumbing and fixtures. But even a liquidation of Chrysler would require further taxpayer intervention. Given the precipitous decline in auto sales for the global auto industry, the market for industrial production capacity for cars in the United States isn't exactly robust. Assuming a buyer didn't materialize immediately, Chrysler would have to keep operating to maintain any viability. If Jeep suddenly stopped making cars and advertising, the value of the brand for sale would decline rapidly. You can make the case that if the government didn't intervene at all, a bankruptcy would have happened sooner rather than later, and that, if the government didn't intervene again by providing more financing, it would have required a swift liquidation at the worst possible time.

Finally, secured debt holders' argument that they're getting the shaft relies on their belief that the true value of the bank debt is worth more than what the government was offering. But in this cycle, investors have frequently overestimated the amount of recovery they could get by taking possession of distressed assets. Think about the banks that foreclosed on a borrower and figured they'd be able to recoup 70 percent of the mortgage's value by selling the home—only to find that when they dumped the house onto a market already glutted with thousands of other foreclosed properties at a time when financing wasn't available, the best offer amounted to only 30 percent of the mortgage's value. That's also what is happening in the world of corporate debt. Ed Altman, the sage of high-yield debt at New York University, estimates that so far in 2009, the recovery rate has been 25 percent (25 cents on the dollar), compared with 42 cents on the dollar in 2008 (about the historical average) and 56 cents in 2007. It turns out that the Detroit executives weren't the only ones counting on a taxpayer-funded bailout.

I don't know. All things being equal I have a preference for the little guy, but this argument boils down to "normally this would be bad, but this time it's good (or at least ok). Trust me."

-Arrian