Obama & UAW Sell The Taxpayers a Lemon
Obama UAW
After the nation was warned just a few months ago that a massive $5 billion bailout with taxpayer cash was absolutely necessary to avoid a “disastrous” bankruptcy at Chrysler, the Obama Administration has now orchestrated, well, a bankruptcy.
Chrysler in Intensive Care
At the time of the bailout many observers noted that Chrysler’s problems – cars that too few wanted, made by too many workers in too many factories – had not been fixed. This was just a temporary band-aid they said. Management wasn’t retooled. The United Auto Workers didn’t change their ways. The products were the same old cars buyers previously shunned. So just how was this supposed to work??
Well, as we now know the band-aid didn’t work, and the Administration now admits the patient needs major surgery. At one level this is just a classic example of government kicking a difficult problem down the road using taxpayer money. But at another level this is a lesson about our brave new Obama world.
Dr. Obama, Dr. Obama To the Emergency Room Stat!
When I heard about the bankruptcy I thought “sad, but at least the taxpayers will now get to own the New Chrysler – for whatever that’s worth – in return for their $5 billion investment.” Then I read the details of what the crack team of finance doctors in the Administration had done. Anyone know a good malpractice attorney?
For those of you not steeped in corporate finance, there is a simple and basic principle concerning how a business raises money to finance its affairs (its “capital structure”): Risk vs. Reward. For example, to raise money the business may take out bank loans, issue bond debt and issue stocks. The banks don’t get paid much for loaning their money to the business, but in the event of bankruptcy their debts are “secured” by the business assets, and they get paid back first. The Banks’ investment is the safest.
Bondholders, being in the middle, get a bigger return when the business is successful, but in bankruptcy they get paid back only after the banks. And who knows, there may not be enough money to pay them back.
Finally, there are stocks. Stock investors get paid out last in bankruptcy so this is the riskiest way to invest money. If things go badly, and the company goes into bankruptcy, they may not get any money back at all. But they should get the biggest return if the business performs well.
Q. So what happened in the Chrysler bailout?
A. When the taxpayers were forced to put up their $5 billion a few months ago what place did they take in the capital structure? They were in the middle – after the banks, but ahead of the stockholders. OK.
Q. So what is happening in the Chrysler bankruptcy?
A. Because the bailout band-aid failed to stop the bleeding, it was time for the various capital providers to line up to get back as much value as they could. We would have expected the banks and the hedge funds (the senior “secured lenders”) to get their money back first. If there was any money leftover it would go to the taxpayers, being in the middle. And if any more money was left over it would go to the stockholders.
Further, if there was not enough money to pay off the senior lenders or the taxpayers, they would be given the residual equity of the business. Alternatively, if some outside entity, like Fiat, came in and contributed fresh money to Chrysler, they could receive some or all of the residual equity for their new investment. That’s how it works for a bankrupt patient in a real corporate hospital.
But this is now Obama-land.
When They Showed Me the Bill I Almost Fainted
As it turns out, here’s what is actually happening. It’s not for the squeamish:
The senior lenders will get approximately $2 billion in return for their $7 billion in loans to Chrysler, taking a loss of $5 billion. And then they walk away; no future equity. Go home. Ouch!
The taxpayers get zero – that’s zero as in zilch, zip – for their $5 billion bailout. And, they and are going to pony up $6 billion more, in return for 10% of the future equity. Double ouch!!
The old shareholders? They are wiped out. Go home. At least this part is as it should be.
Fiat, the Italian Auto Company, is putting up no money in exchange for 35% of the future equity, presumably for their future management and for funding the start up of the New Chrysler. I don’t know if 35% is the right number, but at least it passes the snicker test.
So that’s it, right? $6 billion in new money from the taxpayers, $10 billion in loan losses from the taxpayers and lenders, the old stockholders wiped out and 45% of the future equity handed out.
But wait! Are you doing your math?? Where is the remaining 55% of the ownership?? Oh. Well you see it was given to the United Auto Workers Union. The majority of the company was handed on a platter to the UAW; and they had no money in the game, and are putting no new money into the deal. But they get 55% !!
Now why in the world would the lenders turn and run like yellow dogs with tail between legs and take a $5 billion loss?? They have the senior secured position. This is very, very strange. Well, you see, some of the lenders – the banks - got TARP money. So they are now simply puppets of the government. But what about the other lenders, the hedge funds? Why did they agree? Well, they didn’t!! They had no intention of taking 29 cents on the dollar, so they protested. You see, they had crazy notions that the historical rule of law and how secured lending works would prevail. But not in Obama-land; he stuffed them.
And just why did the UAW get more than half the company for free? Because, they are loyal Democrat Party supporters, of course. They will claim they “gave up” their VEBA claims (employee retirement). However, this is simply factually incorrect. Under law they have no claim on the assets of Chrysler superior to the lenders. None. That’s why Obama had to strong-arm the TARP’d lenders into agreeing, overruling the hedge funds. Second, that VEBA claim was $4 billion. Get your calculators out. Anyone want to tell us why the UAW gets 55% of Chrysler for a $4 billion claim, that was actually worthless, and the taxpayers get just 10% for losing their $5 billion plus a fresh $6 billion!!??!! Answer: Because they have no choice in Obama land, that’s why!!
In Obama-land: UAW 1, taxpayers 0.
When government steps in like this and dictates economic winners and losers it has a very chilling effect on bankers’ and investors’ future decisions to lend and invest money, crushing economic growth and prosperity. This is why socialist economies grow slowly, or not at all.
Just today, Warren Buffet, a part-time Obama adviser, came out and said exactly this. Sadly, in Obama-land you taxpayers and the private sector have no choice right now…unless you are getting a Chicago style political payoff like the UAW.
Well, at least Chrysler finally got the surgery it needed; the doctors cut the taxpayers heart out.
You’re busted.
Standing up for greed. putting hedge fund barrons on top even though they will crush retirees who worked hard, their whole lives in auto plants just to get a little bit more return.
Capitalist greed has no conscience, so it has to be regulated by a responsible government policy.
Obama offered them a reasonable settlement even though their so-called investment was worthless. they got a gift they didn’t deserve after they squeezed the company dry and threw a hundred thousand workers into the street with nothing.
Obama did the right thing.
Two questions, Chuckie:
1. Just how did the lenders (including the taxpayers!!!) “suck the company dry??
2. And tell us, wise one, how do you assess the pros and cons of the competing case law here (laid out in prior Supreme Court rulings): the “absolute priority rule” as described in Raleigh v Dept of Revenue vs “equitable distribution among creditors?” as described in Howard Delivery v Zurich American.
Chuck? Chuck? A little rusty on your bankruptcy law?? Chuck?? Stop drooling and give us your thoughts, Chuck.
And this guy gets to vote…….
aaa again
I don’t have time to study obscure court cases. What do they say?
If they say a greedy hedge fund have to get paid off by retired workers in their 70s and 80s who worked their whole lives, and will end up homeless, without healthcare, then those court decisions are corrupt and immoral.
Those workers kept their end of the bargain. They worked hard for 30 or 40 years and deserve to get the benefits they were promised. No hedge fund should be able to take that away from them.
Obama will appoint fair judges. He already said judges have to have empathy, to change this kind of injustice that starves retirees so the super-rich can get even richer.
Just as I suspected, you “have no time” to become a reasonably informed observer of the law or commercial finance practices that are the serious issues here. Of course, amazingly, you have just enough time to write absurd straw man arguments.
Chuck, sadly, you are just another standard issue empty shell of an intellect, reduced to spewing the economic theories of an over served bar room buffoon.
Observers are laughing, but have a Schlitz on me……..then call a cab, burpy.
my arguments are informed. I’m a worker who looks forward to the retirement management promised. What are you?
After you pour your whole life into a company that company has to live up to it’s side of the deal and pay retirement.
I don’t have to read your court decisions to know that it is wrong to divert a worker’s retirement to a hedge fund speculator!
I asked you what those decisions said. Looks like you don’t know – your just blowin gas!
Chuck
You dont understand what you talk about. Where will the next round of investment dollars come from after Obama and his thugs ripped off the Chrysler investors?
If the rules don’t exist any more, if politicians are going to decide instead of obeying the law then the banks can’t loan as much money and will have to charge higher interest.
Sure the workers deserve their retirement, but there won’t be any jobs for any workers if banks can’t depend on the government to obey its own laws.
If the company has no way to pay the retirement benefits do you want the government to just steal the money from someone else? From business owners who have no retirement benefits?
How do you people care only about laws that help mega-banks and huge corps and hedge funds?
If your going to throw the law in my face, then tell me how a company can promise in writing, in a union contract, to pay retirement benefits and then not set aside the money to keep that promise! How can they get away with saying sorry, the till is empty and guys you lose!
Don’t even talk to me about your “laws.” your laws are designed to tip the playing field against workers.
The same thing happened to me. I had a WRITTEN promise from Hewlett Packard and then they just said never mind. We aint doing that any more.
What the hell good are Republicans if settle every money conflict in favor of whoever is richest, TAKING MONEY AWAY from working class people?
Why would Chrysler’s WRITTEN PROMISE IN A CONTRACT WITH WORKERS even be up for discussion or debate or negotiation? Why isn’t the answer “OF COURSE WE PAY THOSE RETIREES WHAT THEY EARNED” ?
Didn’t your hedge fund bosses – the smartest people in the whole fing world- know there was a WRITTEN CONTRACT THAT REQUIRED PAYMENTS TO RETIREES? Why did they invest in Chrysler if they knew the company had that debt to pay, and keeping that promise would cut too far into the profits?
I didn’t finish…
Maybe the bankruptcy law guru can answer this one.
When people have worked for a company for 20 or 30 years, how can a bank that came in and loaned money 2 or 3 or 5 years ago bump them out and steal their retirement money?
aaa,
Well done! You managed to put the whole deal in layman’s terms. You accomplished what the “professional” MSM journalists fail at repeatedly. And they wonder why they’re failing …
You know … this Chrysler deal, all the way back to the first TARP bill, is looking more and more like a criminal enterprise everyday.
And Chuckie …
Nobody wants to see anyone lose their retirement, OK?
Now that that’s settled … things like this (the entire bailout extravaganza) not only means higher taxes for all of us now (yes, ALL of us), but it means significantly higher taxes on future generations to come. From the worst paying job to the best, today’s children and their children will get a smaller % of their paycheck than we do – meaning a reduced standard of living.
That’s neither right nor fair! So nevermind BS party politics, every American should be opposed to this incredible and abusive spending spree!
Not to mention, as I wrote about on my blog (The Stock Market is Up), because of all the money printed for these bailouts, it’s most likely that our dollar will collapse, sending us into a depression worse than the “great” one.
So nevermind party politics, George Bush was an ass too! This whole thing makes me wonder how much the 2 administrations (parties) worked in concert on it all. It’s surreal.
CL -
It didn’t work with Chuckie, because he’s obviously not very bright and doesn’t understand, or care to undestand, the issues. I guess that’s why he pulls a lever on the assempbly line for a living.
But the dopes get a vote just like you and I.
I’d reply, Chuckie-doo, but it has become apparent that it would be more intellectually stimulating to debate a turnip.
But feel free to submit an essay to our blog proprietor laying out in detail the justification for your position. I believe essays north of 8th grade level are acceptable, so try hard and you might get there.
By the way, Warren Buffett echoed my sentiments yesterday. That guy might have some potential.
yeah, the man with all the answers has no answer to simple questions about justice. You don’t know why it’s OK to shred a contract with workers, but never a contract with a hedge fund.
And, I don’t pull levers. I’m a cubicle worker.
Uh, Chuck, because the terms of the contracts provide for the very points I am making. Sorry about that little factoid.
Google “Bankruptcy Litigation Blog” for excellent coverage of this issue. But beware: they use big words, and are not prone to the sort of cartoonish arguments you make. You may be better suited to arguing with the jelly-bellies at the bar.
Back to your stapling now……..
For CL, Sarah, and Boomer.
George Will. Always a good read. For Chuck, not so much. Perhaps the Communist Workers Party Daily…..
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/06/AR2009050603320.html