This is what happens when the government picks winners and losers: big unions walk away with GM and small investors get thrown by the wayside. Sooner or later, we’re going to have to return to some kind of normal economic activity, and when that happens we will need investors, large and small, to feel it’s worthwhile getting back into the market. Deals like this one are going to make that awfully difficult.
People are reeling from having their 401ks wiped out in the current market slide. And now those who had for years bought what they thought were “safe” blue-chip corporate bonds are discovering they were only safe until they were told by the government to go fly a kite because government wants to pay off the unions instead. That is deeply unfair to small bondholders, and it’s dreadful economic policy. As a friend of mine put it to me, “Who in their right mind will buy corporate bonds now? And if nobody’s buying bonds, how exactly are our debt markets going to get humming again? What a mess.”
It’s almost like they want to wreck the economy.
[Update a couple minutes later]
Apparently, Ken Lewis, head of B of A, has been fired.
The question is, who did it? The shareholders and board (you know, the old-fashioned way), or was it our new head of the economy continuing to grab more power?
[Update]
Apparently it was the board. And he’s still CEO, just not chairman.
I’m gonna major in “un-freezing.”
Re: Lewis – Nah, he still has his job. It was CALPERS (as shareholder) that tried to get him fired though over his purchase of Merrill Lynch (even if it was at gunpoint), but Bloomberg is reporting that the effort to unseat the Board was repelled. I guess the other common stockholders recognized that Lewis just did what anyone would have done with a gun to their head, so there’s no point firing him over that.
Re: GM – It’s certainly not a sure thing that the bondholders would approve this deal. Why would they? There’s no way they get just 10-cents/dollar in bankruptcy. And 90% of them have to tender to get this thing approved. I think it’ll fail (barring a massive Legislative taking that puts Kelo to shame).
Silver lining though – companies with strong government ties (especially unions) will probably be frozen out of the private debt markets for years (decades?) to come if this happens, possibly to the point of leaving independent “Ayn Rand-like” firms with a monopoly over private capital. That could have positive long-term consequences.
Glenn Reynolds is fond of pointing out that nothing cures the common Muslim’s infatuation with terrorists like putting them in control of the local government. Same could be true to Socialists.
In Bankruptcy, the Bond Holders are in no better shape,
Bonds are unsecured creditors, so they will get no more then those unsecured creditors the pensioners.
If A bankruptcy were done, what makes anyone think the bondholders would be any better off, then this restructuring? Most Restructurings end up with the creditors owning shares in a running company.
If A bankruptcy were done, what makes anyone think the bondholders would be any better off, then this restructuring?
Gee, why don’t we do it by the law, instead of government fiat, and find out?
Because maybe, the union and the government wouldn’t come out as well in that circumstance?
Um, bankruptcy law does a pretty good job of protecting bondholders better than this particular deal does.
I prefer that those hopey-changey, tingling up the leg, hard-core journolists interview some of the folks relying on these bonds for their retirement, and ask THEM what they think of the State-sponsored deal.
I am not holding my breath… George W. Bush is no longer President, so there is no political gain (for the journalists) to be had with such questions.
Jack, I’d have to say that it does look like the pension holders and of course, the US government got more than other unsecured creditors. And what’s with Fiat? What did they offer to get so much of Chrysler?
MG
Bankruptcy law as I remember it, created various classes of creditors, Priority 1-X
Priority 1 was the IRS.
Priority 2 was the lawyers and Court costs.
Priority 3 was secured creditors
Priority 4 was Salary/compensation
Priority 5 was Employee benefits.
Priority 6 is materials/Claims
So unless those bonds were secured against property,
the bondholders are the lowest priority in benefits, but,
then it’s all controlled by 11 USC 507, and that’s the law,
not some blowhards opinion.
You left off where stockholders (private or government) are supposed to show up.
Priority 7 Bondholders
Priority 8 Preferred shareholders
Priority 9 Common Stock.
Typically in a chapter 11, Class 5-9 get wiped out and replaced with new shares in rough value weighted for priority, and then Class 1 and 2 get paid off entirely
and 3 and 4 take a hit.
I read the Bankruptcy code back in the 1970’s so i’m not exactly current, but, most people have no clue how it works.
For some reason the Chrysler bondholders object to the govt’s non-bankruptcy plans for that company. I can’t imagine why.
Chrysler is a funny case, from what I can tell, the Chrysler paper that Cerberus holds is very unusual. It’s secured by the buildings, the brands, the IP and soft goods of Chrysler.
So whereas ordinary bondholders are creditors the same way Delphi is, in this case, they have some securitization rights much like a mortgage holder.
Now, they feel that gives them a gun to point at all the lower rank creditors.
THe problem is this is such an unusual case, the outcomes are goofy.
Normal Bankruptcy was process sized for say a small grocery store. The bank has a mortgage on the building, the creditors are owed for stock, the employees are due back pay….. So the bankruptcy comes, the bank says “Look, these guys can’t pay the mortgage, let them move out into smaller space become a corner grocery, and i’ll sell this building as a small clothing retailer” In this case the secured creditor is acting to reduce his risk.
The secured creditor gets 90% back, and is happy as opposed to getting a mortgage payment cut in half, or 40% on the dollar.
But consider chrysler? Who believes in their brand? It’s a crappy brand. Who wants car factories in Detroit. Heck, GM and Toyota are closing better plants, that nobody wants. So what are the factories worth? Zip?
Here the Bondholders are trying to shake down the lower priority creditors when in many respects they are the only worthwhile asset. Workforce, design teams, engineers.
Unless I’m mistaken it’s the only one of the Shrinking Three that isn’t/wasn’t publicly traded.
I dunno, jack. Seems to me the key question here is whether we’re talking about the pensions and health care benefits of past workers already promised, or whether we’re talking about the pensions and heath care benefits of future workers. If it’s a competition between the people who loaned GM money and the people to whom GM already promised money, folks who are already retired under a defined-benefit pension, whatever, then all that you’re saying makes sense, both ethically and legally.
But it’s not clear to me, at least, that this is what’s happening. Seems to me that the UAW wants to protect future pensions and benefits, which have not yet been awarded or earned, and the deal here may be to impoverish the bondholders in order to do so. That doesn’t fly morally, and I suspect it wouldn’t legally either. GM’s existing promises to bondholders, however low on priority list of other existing promises, are certainly of higher priority than any future promises not yet made.
Post-script: it’s also worth nothing that Wehner’s Corner comment is about the economics of this decision, not the legality. Plenty of shit is legal without being moral or economically wise (Kelo, anyone? Dred Scott? Slavery before 1862?) The confusion of what is legal with what is moral or right or wise is a typicaly mistake of the Left, with their strange obsession with laws and structure.
What Wehner has said is that, however legal this particular deal may be, it will prove disastrous economically, because people will simply stop investing in businesses where there is even the ghost of a threat of government intervention.
It may even be happening already. The first-quarter economic reports just released were interesting in that consumer spending and confidence bounced up, which ordinarily puts an end to a recession. But not this time, because business pessimism and retrenchment was so strong it overwhelmed the consumer side of things.
We may be entering a weird new world, where the bashing the supply side has taken from government and an ignorant public opinion is so severe that the demand-side solutions of the past century are not going to work. Just as in East Germany circa 1985, consumer demand may be sky-high, but if no one can or will organize the forces of supply, nothing happens.
Carl
There are incongruities in the Bankruptcy code. Current employees are considered at higher priority then retirees.
When a reorg is being done, the current employees have to come first because they turn wrenches on the line. The past employees they are gone.
While Morally, there is a contract with the past pensioners, they don’t stand very high in the queue, which is a cruelty of the system. Secured creditors sit ahead of people who spent 50 years in a factory.
It’s why Pension funding fights are so ugly. The vultures seek to declare a pension as over funded, and replace cash/bonds/ good stock in there with their own company stock. PBGC and ERISA set this, unfortunately ERISA suits are hard and expensive, so senior managers began raiding pension plans to increase bonuses. Most big entities have wildly underfunded pensions now. Enron was in the utility buying business because they could steal all the pensions.
So political cronies go to the head of the line in Obamas GM bail out plan. Just what you’ld expect with a Chicago politician with Obama’s background.
Guess those pension folks holding those “safe blue chip bonds” and “clinging to guns and God” will have to take one for the Obama team..
All those pension funds sitting on GM paper of all kinds are done. GM is bankrupt. So are the biggest banks in this country.
If they all went to Chapter 11, a judge could figure out the best thing to do.