Sunday, May 3, 2009

Chrysler, its creditors, and the UAW: The new boss is the same as the old boss, but he has different friends

While our friend Tommywonk is excited at the prospect of stakeholder capitalism at Chrysler, with the UAW ending up with 55% of the company and $10 billion to guarantee its healthcare fund, the situation is more complicated that this in terms of the consequences:

And for those who object to government and unions having a say in how the company is managed, it's worth pointing out that the feds stepped in when Chrysler had nowhere else to turn for capital.

One of his own commenters (Edmund Dohnert) noted:

Chrysler has been losing market share for years and will probably continue to do. Their marriage with Daimler Benz turned out to be a fiasco, and I don't see why Fiat and the other 'stake holders' will fare any better in some reorganized Chrysler.

And even without our current depression, the US has for years had far more auto production capacity in relation to any realistic projection of demand. Quite simply, we have an industrial bas capable of producing far more cars than are required. There are also far more auto workers than are required.

So, in the end I don't think that 'saving' Chrysler will save many US auto industry jobs, simply because the industry in its current form can only support so many workers and no more. So, it hardly matters whether those workers are spread out amount two remaining US auto companies (Ford and GM) or the original Big Three.

I predict this move will prove to be a total waste of taxpayer's money, just like all the other bailouts.

I've been arguing for some time that the reason we see auto-makers in trouble is that the market is correcting the fact that we were producing too many vehicles for the available market.

But there is another, more fundamental issue about this government-mandated restructuring and the new way that favorites are played in DC under the Obama administration, as A Secondhand Conjecture notes:

20 Chrysler lenders or about 30% of the debt Chrysler owes lending institutions are objecting to getting fleeced in the governments planned “surgical bankruptcy” plan. In a normal bankruptcy the senior secured creditors (the lenders) are first in line, while unsecured lenders (UAW) and equity holders are last. This is the basis for the lenders’ complaint:

Creditors object to the way the restructuring benefits the United Auto Workers union, which is an unsecured creditor, for the $10.6bn Chrysler owes to its retiree healthcare fund.

“What’s happening is the senior secured creditors are going to get 29 cents on the dollar and the unsecured creditors are going to get $10bn,” said Mr Lauria.

Now I think the obvious unasked question is, if the lenders are getting such a raw deal, why are only these institution objecting? what about the other lenders making up 70% of the loans? Your indirect answer is present toward the last half of the article.

Chrysler’s four main banks - JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup - had received about $90bn in government bail-out [TARP] cash.

Now we see why these banks are going along with losing all this money. They are scared of the government’s wraith. After Congress almost retroactively changed their contracts wtih AIG, and Attourney Generals outright theatened AIG executives physical well being, these TARP banks realize that the government is NOT bound by following the rules of law and can punish them for not acting in the government’s best political interest, namely, making sure the UAW is placated.

This is a critical point: call it what you want, the government is using heavy-handed tactics to modify contracts retroactively in pragmatic pursuit of social, political, and ideological goals (while simultaneously insuring that the Goldmann Sachs mafia benefits). The law of contract is fundamental to the ability to organize capital and do business (as well as being constitutionally protected in Article 1, Section 10).

I am sure there will those who see this as an advance in economic justice or social democracy, but the implication that no legally-entered contract is now safe from the government restructuring it in favor of some creditors but not following law and precedence is an important deviation away from the rule of law toward the rule of politicians without constraint.

[Note: please spare me the the tiresome complaint, "Where were you when Bush was ruining the country and getting us into this mess?" The fact that one party, which has now been resoundingly rebuked at the polls in two successive elections, routinely violated the Constitution and favored its political supporters does not excuse the same behavior on the part of its successors. And while a different constituency is now reaping the benefits, it is the same behavior.]

[Note two: under what would you have the government do? I've been clear about that as well. Chrysler should have gone into bankruptcy as a matter of course months ago, before taking additional billions of our dollars down the rathole with it. If the government decided to guarantee the workers' healthcare plans, that would have been one thing, but the current arrangement is quite another.]


Delaware Watch said...

"I've been arguing for some time that the reason we see auto-makers in trouble is that the market is correcting the fact that we were producing too many vehicles for the available market."

Do you think that the domestic market is large because of the amount of foreign imports into the market and that if the US auto companies had produced cars that were more competitive that they would have fared better economically?

Steven H. Newton said...

I think the whole foreign imports issue is something of a red herring. The difficulty is that we based way too much on having the productive capacity to create cars at a rate wherein people are being encouraged to get out of their current car every 2-5 years. As a result, between all the auto-makers foreign and domestic we have a gigantic glut of new and fairly new cars. The issue with domestic v import may be determining which manufacturers are going out of business first, but if you look at production stats for the past few years it was evident that it had to happen to somebody.

To use a bad comparison, Chrysler should not be in the hospital right now, it should be in hospice.