Bondholders are kicking and screaming, but it appears as if General Motors Corp. is headed for an orderly bankruptcy, and the Obama administration is about to be handed the keys to a venerable corporate institution. Again.
And again, the administration seems to be rewriting the rules of capitalism to fashion a deal to its liking.
Purists -- and virtually every academic economist one happens to encounter -- wonder what happened to the once inviolate principle of rewarding risk-takers. Unsecured creditors will get less of a stake in the new GM than its employees, and you can forget about poor unadorned stockholders. (The administration promises some unspecified protections for creditors; we shall see.)
As in the deal with Chyrsler's bondholders, the administration muscled its way through the negotiations and used its considerable leverage to convince secured debtholders -- the highest class of investors -- to accept a fixed return that was significantly less than many of those investors had expected when they put money into the falling company. Who benefits? The question isn't very apt, because everyone is losing something. But, on balance, the unions are getting a better deal.
The unions, who support Democrats -- and whose work rules arguably hastened the collapse of the American auto industry.
Asked whether the Chrysler and GM bailouts were sops to unions at the expense of secured creditors, administration officials answer the subject of the question. That may be the case, they respond, but the other choices were untenable. As to the charge that the Obama economic team is redefining capitalism, erasing incentives for investors and acting like a gangster, I would wager an hour's worth of UAW productivity that officials, in private moments, would concede that these things are so. But they'd argue that, where critics see a contempt for capitalism, what's actually taking place is a revision of the informal rules that governed capitalism into the ground. A cultural revolution, if you will.
It is absolutely true that there are exigent circumstances; that the domino effect of two major auto company failures would cascade into a catastrophe even greater than the one we've experienced. The government's $15 billion stake in GM gives it actual leverage. At the same time, though, the Obama team is pushing a policy outcome that will advance Mr. Obama's economic worldview, one that treats the era of money capitalism, and all of its rules, as suspect.
The pattern is clear: threats from the government to abrogate employment contracts...public repudiation of the Wall Street bonus structure...proposals to change tax rates for corporations doing business overseas...the equating of hedge fund managers with "speculators," a term rife with history -- and a word that came out of the president's mouth during the frenzied Chrysler negotiations.
Note that, aside from threats and suasion, the administration hasn't done anything. The bondholders (with notable exceptions) agreed to these two deals. No laws have been broken. Everyone has sacrificed. And the unions have already given up a great deal -- and, in doing so, put their trust in the administration. Here's the Obama perspective on these deals, in six bullet points.
1. Secured debtholders were the blood cells of the money economy, and they're very important now. But employees ought to be valued by the market system, even if there is no way to measure their contribution. The Obama administration supports the union movement. Mr. Obama ran on a platform of empowering unions. This move empowers unions.
2. The administration believed that, absent tough talk, hedge funds and debt holders would have driven GM into bankruptcy; they'd get paid by, say, stripping down and melting the metal beams from the factories, and everyone else would get screwed. Incentives, in this case, would not have saved GM.
3. Chrysler, a much smaller company, might well have been left to die. But its failure at the time when the decision needed to be made -- its failure, in other words, in the context of a collapsing economy -- would have been much more catastrophic. The administration believes that its intervention will buy Chrysler a few more years. If it fails in a few years, that's bad -- but not destructive.
4. Unions aren't getting off scot free. They've got to reorganize the company. They're going to have to meet aggressive profit goals. They're now responsible for the legacy benefits. And investors aren't necessarily going to be willing to put money in GM now, especially given the precedents set by the government. The UAW may be on its own.
5. Here's a version of this argument, by private equity manager Scott Sperling:
"Far from harming capitalism, the Obama administration's policies concerning GM and Chrysler are very much in line with the process of "creative destruction" that the economist Joseph Schumpeter described as the active heart of capitalism's success. The government has been willing to support an important industry -- but only on the condition that all stakeholders make the tough choices necessary for the companies to succeed in the long term. This is capitalism at work."This argument may not buy Obama good will on Wall Street, but it faithfully represents what he's thinking.
Editor's note: A version of this column appeared on CBSNews.com
Sperling is correct.
The flip side of "rewarding risk takers" is also that they must lose if they make a poor choice -- risk capital has to have risk as well as reward.
In private equity, the first rule is "the last money in sets the rules". They guy bringing money to the table when no one else will, in this case the US government, gets to rewrite the rules. Here it isn't just a question of the $15B the US has already put in (and presumably put it in front of, or combined with, the bondholders), it is that the US is prepared to put more in to revive a restructured business. Without that money, everyone loses everything, except the secured investors. That's why the shareholders are out and bondholders only get a fraction of what they may have expected, excepting if they were willing to force GM into liquidation instead of a restructuring, which apparently they either weren't willing to do or couldn't as part of the deal for the bridge funding of $15B the US put in. The second rule is that you want to keep good, motivated employees.
The resulting deal appears to reflect pretty normal market behavior, by the Obama administration, just an atypical funding source. Quite in contrast to the Wall Street bailouts with no accountability for the use of funds or even the proper reporting of how they were used.
Obama is going to create so much debt for our country I'm afraid we will never recover.
Mr. Ambinder,
No doubt that a "new capitalism" is a valid subject when economies flail and near the edge of failure.
Obviously the same old same old becomes suspect, and the want for new directions seems natural.
What strikes me is that the 800 lb. gorilla in the room, stupid wars, are not being dealt with in the same urgent matter as car companies are.
Perhaps it is our wars that should file bankruptcy and be done with it.
View from Russia
American capitalism gone with a whimper
27.04.2009
Source: Pravda.Ru URL: http://english.pravda.ru/opinion/columnists/107459-american_capitalism-0
It must be said, that like the breaking of a great dam, the American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.
True, the situation has been well prepared on and off for the past century, especially the past twenty years. The initial testing grounds was conducted upon our Holy Russia and a bloody test it was. But we Russians would not just roll over and give up our freedoms and our souls, no matter how much money Wall Street poured into the fists of the Marxists.
Those lessons were taken and used to properly prepare the American populace for the surrender of their freedoms and souls, to the whims of their elites and betters.
First, the population was dumbed down through a politicized and substandard education system based on pop culture, rather then the classics. Americans know more about their favorite TV dramas then the drama in DC that directly affects their lives. They care more for their "right" to choke down a McDonalds burger or a BurgerKing burger than for their constitutional rights. Then they turn around and lecture us about our rights and about our "democracy". Pride blind the foolish.
Then their faith in God was destroyed, until their churches, all tens of thousands of different "branches and denominations" were for the most part little more then Sunday circuses and their televangelists and top protestant mega preachers were more then happy to sell out their souls and flocks to be on the "winning" side of one pseudo Marxist politician or another. Their flocks may complain, but when explained that they would be on the "winning" side, their flocks were ever so quick to reject Christ in hopes for earthly power. Even our Holy Orthodox churches are scandalously liberalized in America.
The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been a record setting, not just in America's short history but in the world. If this keeps up for more then another year, and there is no sign that it will not, America at best will resemble the Wiemar Republic and at worst Zimbabwe.
These past two weeks have been the most breath taking of all. First came the announcement of a planned redesign of the American Byzantine tax system, by the very thieves who used it to bankroll their thefts, loses and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more then ordinary street thugs, in comparison. Yes, the Americans have beat our own thieves in the shear volumes. Should we congratulate them?
These men, of course, are not an elected panel but made up of appointees picked from the very financial oligarchs and their henchmen who are now gorging themselves on trillions of American dollars, in one bailout after another. They are also usurping the rights, duties and powers of the American congress (parliament). Again, congress has put up little more then a whimper to their masters.
Then came Barack Obama's command that GM's (General Motor) president step down from leadership of his company. That is correct, dear reader, in the land of "pure" free markets, the American president now has the power, the self given power, to fire CEOs and we can assume other employees of private companies, at will. Come hither, go dither, the centurion commands his minions.
So it should be no surprise, that the American president has followed this up with a "bold" move of declaring that he and another group of unelected, chosen stooges will now redesign the entire automotive industry and will even be the guarantee of automobile policies. I am sure that if given the chance, they would happily try and redesign it for the whole of the world, too. Prime Minister Putin, less then two months ago, warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster. Apparently, even though we suffered 70 years of this Western sponsored horror show, we know nothing, as foolish, drunken Russians, so let our "wise" Anglo-Saxon fools find out the folly of their own pride.
Again, the American public has taken this with barely a whimper...but a "freeman" whimper.
So, should it be any surprise to discover that the Democratically controlled Congress of America is working on passing a new regulation that would give the American Treasury department the power to set "fair" maximum salaries, evaluate performance and control how private companies give out pay raises and bonuses? Senator Barney Franks, a social pervert basking in his homosexuality (of course, amongst the modern, enlightened American societal norm, as well as that of the general West, homosexuality is not only not a looked down upon life choice, but is often praised as a virtue) and his Marxist enlightenment, has led this effort. He stresses that this only affects companies that receive government monies, but it is retroactive and taken to a logical extreme, this would include any company or industry that has ever received a tax break or incentive.
The Russian owners of American companies and industries should look thoughtfully at this and the option of closing their facilities down and fleeing the land of the Red as fast as possible. In other words, divest while there is still value left.
The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker.
Stanislav Mishin
The article has been reprinted with the kind permission from the author and originally appears on his blog, Mat Rodina