President Obama's interference in the Chrysler bankruptcy is disgusting.
1. Disregard for bankruptcy law
When investors invest their money in a company, the agree beforehand who gets what and when if something goes wrong. In the Chrysler capital structure, everyone, including the Unions, agreed that the 1st Lien Lenders would get paid first and so long as they did not get everything back, no one would get anything else.
President Obama has now decided to build an economy based on politics and popularity rather than on property rights and contracts.
The restructuring plan gives the Unions far more recovered value than the 1st Lien Lenders or other creditors in the same position as the Unions would be getting.
Why? There is no question of fairness. The Unions agreed to their subordinate position beforehand. Daimler, the previous German owner of Chrysler, even offered $1 billion to get them to agree and the Unions accepted. Suddenly, the Unions are allowed "backsies" and take that money out of the hands of the 1st Lien Lenders and the US taxpayer.
If President Obama wants to use taxpayer money to subsidize the Unions that's one thing. A waste of taxmoney, but within the bounds of democracy. If President Obama wants use investor money to subsidize the Unions, that's kleptocracy.
2. The use of death threats to enforce his will
President Obama used the bully pulpit without regard to the safety of human life. Investors who disagreed with him became targets of a lynch mob that he stirred. Safety and security were the reasons that these dissenting investors dropped their court case.
The courts of the United States exist to protected us from the tyranny of the majority. When the President himself is at the head of the mob and is directing its anger to prevent the court case from even being heard, then we are losing our individual freedom.
This is mobster behavior, not Presidential behavior.
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No , but you have to understand its politics, if something goes wrong obama may get the blame for not having a bailout.
ReplyDeleteObama is doing remarkly well, not breaking but he will bend but no break, he has to bend though, after all he got millions of dollars in his campaign raised.
Don't forget in politics progressives have goals , however its hard to come up against money and power, so the ideal situation or the only situation for a progressive is to throw good money v. bad money (trial lawyers,unions, environmental groups, bill gates, warren buffet, bankers, vs. oil companies , more conservative insurance companies, chemical and manufacturing companies, etc. Often times one group of telecoms may support conservatives and one liberals.
ReplyDeleteAs such the democrats cannot be fully progressive , but you need money to run a campaign, obama is trying to balance it out, bending but not breaking as you can very well tell.
Ocassionaly, politicans may lop-size and becoming DINOS or RINOS in many ways , so throwing the fight is the sure way politics is going. Check out the blog tortdeform or corpreform from the Drum Major Insitute or Injuryboard, one of the ideas of the republicans was to take away the ordinary persons way of suing a big corporation, by limiting damages, making it difficult to sue with procedures, or making litigation expensive and not economically worthwhile.
The idea was also to limit money to the democratic party, suppose a doctor cuts off your leg by going to lunch or by not diagnosing an infection, usually malpractice is done by careless easily preventable errors.
In that case you have a non-economic damage, that is your leg is cut off so there are no economics to it. If you have a CEO who makes $10 million a year in a period of 5 years and he goes blind or has his leg cut off or lets make this simply he dies, that's economic damages , he can sue for lost wages.
The Gop doesn't want to limit that , but wants to limit non-economic damages, if a child or a infant dies or becomes blind, there is no economic damages , its non-economic at 250k.
However, the cost of doing a lawsuit can easily cost over 100k and there is no guarantee of winning, friviolous lawsuits are rare in malpractice , its all gop propaganda.
As such the insurance company and the doctor is not held responsible, this is true in california, texas, and many other states, often the government picks up the tab for long-term care.
So trial lawyers need to fight, and unions, with money - it doesn't serve the democratic party all the time to go to lop-sided, on the other hand the example above proves it doesn't pay for the democrats to become centrist.
To the person who runs the blog, approval and moderation of comments exists for previous posts, making it a bit slow to see posts and get replies.
ReplyDeleteAs a suggestion maybe should post a profile of yourself so people get to know you a bit , it can be brief and basic saying you were a poli sci major and the link from so and so to increase traffic to the blog.
I haven't seen anyone else post, so there really isn't any debate going on at the moment.
Purely from an economic point of view, one could argue that the government is contributing money to help Chrysler survive and therefore it's entitled to impose conditions on how that money is used. Some say that if the government hadn't offered support, the bondholders would have ended up with nothing. On this argument, it's not a standard bankruptcy but more of an equity investment, with conditions attached to the money.
ReplyDeleteA related point is: is it the government's business to be imposing those kind of conditions? A justification could be that
there is an externality cost to unemployment and to the severing of healthcare benefits to the existing and retired workforce. Therefore the government is acting in the taxpayer's interest (and that of society) by structuring the rescue in the way it has.
However I recognise that these arguments need to be weighed up - the cost-benefit balance is not obvious.
On the second point, if the President has indeed been whipping up a mob that is insupportable. I doubt that was his intention, but perhaps his words have been unwise. Do you have any specific quotes or links to relevant news stories, as I'd be interested to see what he said and what the consequences have been.
Thanks to Ravi for alerting me (in comments to my own blog) to this posting.
Response to Leigh:
ReplyDelete"Some say that if the government hadn't offered support, the bondholders would have ended up with nothing."
That is possibly true. However it's typically the bondholders that get to make that decision. There were some dissident bondholders who disagreed with the plan because they believed that they would get more without government support.
Some random articles on the topic:
The objection:
http://uk.biz.yahoo.com/08052009/325/chrysler-dissenters-say-quiet-support.html
The death threats:
http://europe.autonews.com/article/20090504/ANE02/305049861
The outcome:
http://www.bloomberg.com/apps/news?pid=20601103&sid=as5MNupxGoGg
Not the best but the quickest I could find.
Leight, I like your analyzsis of the pros and cons, but the bottom line is this simple and pure politics, I rekon now gm took bankruptcy protection, but yes there was a cost benefit analysis,
ReplyDeleteand of course normally government doesn't interfere with private decisions of bondholders.
While government can condition aid, chrysler had its competitors who could do much better, it wasn't like the banks who are tied directly in the position.
Figured I'd post, a family member recalled how expensive it was back in the 1980s to buy a toyato due to tarrifs, even clinton wanted to slap tarrifs 10 years or so later, only after toyato lobbyists decided to build production plants in the United States and such , did such action subsided .
Its really hard for a lot of current younger generation people to rememeber that but that was the scenario, my family member ended up buying an American car and had nothing but costly repairs and problems and break down while driving.
It had to do with poor engineering and using 2 incompatible methods and other various issues demonstrated the arrogance and lack of quality control in american cars. A gm car did a bit better but still had problems.
We've come a long way, there is no guarantee things will hole up, there is competition with hyundai, but you know politics can be corrupt and a dead end, and lobbyists are sometimes half in the consumer interest and sometimes really not.
I am hoping obama is less arrogant and less influential by lobbyists than clinton, he sure seems so but as to far he will bend without breaking possibly, if it doesn't affect the agenda.