Is Chrysler deal an error by Obama?


I wonder if Barack Obama’s administration is making a big mistake with the way it has pressured lenders to take a ‘haircut’ in the Chrysler bankruptcy.

America’s government, keen to protect workers, is providing taxpayers’ cash to keep the lights on at both firms. But in its haste it has vilified creditors and ridden roughshod over their legitimate claims over the carmakers’ assets. At a time when many businesses must raise new borrowing to survive, that is a big mistake.

So says an article in The Economist.

I agree. The fact that I do will not alter the outcome as I am well aware.

From a governance perspective I see two immediate outcomes:-

One:-The action taken is likely to make it more difficult for firms with risk to obtain funding in the future as well as more expensive. There are suggestions, by some, that banks in receipt of TARP funds were pressured into agreement.

This is not good, many of the lenders whose rights were trampled underfoot by the Obama Administration were in fact managers of insurance funds and/or pension schemes either directly or indirectly. They will receive at best 28cents on the dollar. Yet the union/workers whose exorbitant contracts did much to drag down the automakers will receive 43 cents on the dollar and 50% of the re-structured company.

Two:-The Chapter 11 process has been manipulated:-

In effect Chrysler and the government have overridden the legal pecking order to put workers’ health-care benefits above more senior creditors’ claims, and then successfully argued in court that the alternative would be so much worse for creditors that it cannot be seriously considered.

The signals this sends at a time when governance overall needs to be improved and frameworks strengthened is not a good one. To me it seems to weaken the moral position of the government as it seeks to improve oversight and compliance.

The article concludes:-

In a crisis it is easy to put politics first, but if lenders fear their rights will be abused, other firms will find it more expensive to borrow, especially if they have unionised workforces that are seen to be friendly with the government.

It may be too late for Chrysler’s secured creditors and if GM’s lenders cannot reach a voluntary agreement, they may face a similar fate. That would establish a terrible precedent. Bankruptcy exists to sort legal claims on assets. If it becomes a tool of social policy, who will then lend to struggling firms in which the government has a political interest?

A bad start by Barack Obama and bad news for savers and the vehicles they invest in.

A useful question would be to ask if the bank stress testing just completed allowed for these political machinations. The assets have been made more toxic by these actions. Clearly in certain instances it is better to be a member of a powerful union, rather than a saver and investor via an insurance or pension fund.

Are we seeing what appears to be politicised bankruptcy proceedings here? This has the appearance of abuse of power. Foreign lenders for example may well choose not to lend in future.

Given the hundreds of billions of dollars the auto-industry has wasted in the last 20 years propping these dinosaurs up; vilifying their creditors and preferring the UAW workforce which has been so change resistant just does not seem rational.

This is in my opinion one of the reasons I am dubious about so called stakeholder capitalism which my preceding blog post was about.

If the aim is to treat ‘stakeholder’ approximately equal then what is equal about the treatment of the UAW in this instance.

This arrangement seems to overturn much legal precedent and ‘invest’ taxpayer funds in a dinosaur industry. Fiat seems to have secured a potentially very good deal for itself. The UAW likewise. The new Chrysler will fail of course if the UAW persists with it’s past attitudes and if management does not understand that the nature of the world has changed. Current investors and the US taxpayer seem to be the losers here. Perhaps I will be proved wrong.

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