In the “era of excess” we have seen since the turn of the new millennium, the UAW now holds the crown for demanding and receiving the most lavish employee salaries and benefits. The diamond in their tiara is a $35 billion health care trust.
As General Motors nears the deadline for bankruptcy filing and frantic Treasury Dept. negotiations continue with the second of the most-troubled automakers, the gluttony of the pensions and health care expense for retirees is apparent. It says a lot that, tough as it is to impress the federal government with excess, the UAW is nonetheless able to do so. Though offered a seat on GM’s board for an exchange of stock, the union is said to be passing on the exchange for common stock. We have passed a milestone here in killing the golden goose. Even the UAW feels that a preferred equity stake (paying out just over a half billion a year to the union in dividends) would be a better option over the common stock of the corporation they have held hostage for nigh on 50 years. While the union continues to make money to line their own pockets and to donate prolifically to Democrats, the workers will see reduction in some of their benefits, most notably for retirees who will no longer have a free ride on the cost of health care.
While we debate and marvel at this whole squabble where the U.S. government and the UAW make their plans to end up with ownership of GM, the debate is larger than what many realize. It is the struggle for private vs. public ownership and property rights under law which have been upheld through centuries, and which are the underpinning of our success in growth of our capital markets. Earlier negotiations and pressure by the Obama administration served to pay only 10% to GM’s senior secured lenders who would have been first in line for bankruptcy liquidation (after of course the lawyers). Citigroup and J.P. Morgan Chase have expensive and thorough legal counsel, resulting in a stop/restart, and where the senior lenders are paid in full what they are owed (about 6 billion) in the government’s latest arm-wrestling. Now to the bondholders, who are the most important part of this process in terms of the lasting strangle this whole debacle will be for capital markets going forward.
If the federal government through the Treasury Dept. somehow manages to pressure a debt-for-equity swap, shame on the bondholders for their agreement to such a dubious arrangement that even the union sees fit to say “no” to. If GM files for bankruptcy (a conclusion many believe will happen), the bondholders of GM debt should be first in line after the senior loans of the corporation. They should be before the U.S. government and taxpayers and certainly before the unions, if we ever expect private investment in U.S. corporations somewhere out there. The bond markets have long memories. Any disadvantageous treatment of those who put their capital in a U.S. company and are elbowed aside because the government got there after the fact will mean no one (repeat no one) will invest in a U.S. company’s debt in the future. What they will fear is that the U.S. government can come in after their investment and threaten shareholders and bondholders alike as they have done in the situation with the automakers (and FNMA and FHLMC), washing out their equity and debt interests before the argument even hits the bankruptcy court. Investors already have come to the realization that no U.S. corporation is safe from government takeover and intervention if given a liquidity advance under the present system, and the prominently-mentioned desire of the Obama administration is to further direct how private corporations spend their money and conduct their business. In the past, when a corporation failed, it meant bankruptcy courts and it meant established case law and orderly settlement of debt. In seeking to circumvent and re-arrange prevailing law in order to benefit the government and unions first, we may as well say “goodbye” to capitalism. Then again, maybe that’s precisely what the Obama administration wants.
MUT’s Money Links: Hot Air’s Ed Morrissey reports that the bondholders are not abandoning capitalism without a fight. General Motors announced this morning that its bondholders had rejected a plan to give almost 40% of a restructured GM to the UAW while they got only 10% for their investment. GM needed 90% of its bondholders to agree to the government-imposed deal for it to win approval and keep the company out of bankruptcy. Mut’s Money Quote: However, as the Obama administration demonstrated during the Chrysler liquidation, they’re not terribly concerned about staying within the lines of bankruptcy law, especially when they can pressure creditors to cough up assets to the unions. How long will it be before these bondholders get seminars from Steve Rattner and the auto industry task force on the “madman theory of the Presidency” and its implications for heartless “speculators” such as themselves?
A compelling case is being made the the Obama Administration is targeting GOP-supporting car dealerships for closure. From Gateway Pundit, Mut’s Money Quote: Earlier it was reported that the Obama Administration may have targeted GOP donors in deciding which Chrysler dealerships would have to close their doors. Last night it was discovered that a Big Dem Donor Group was allowed to keep all 6 Chrysler dealerships open…. And, their local competitors were eliminated by Obama’s task force. The closings also tend to be “Red” Counties where Obama lost. Rep. Vern Buchanan (R-Fla) lost his Chrysler dealership in Florida. Rep. Buchanan found out about it from a fellow colleague. Again… It was Obama’s task force who made the decision about which dealerships would close and which would stay open.